As China opens up its capital markets, many foreign institutions are eager to target the country's local investor base with mutual funds. But aspiring interntional asset managers have had their ambitions to gain mutual fund management company (FMC) licences stymied by strict regulatory requirements and intense local competition.
Four years after China opened up its private fund management sector to foreign players, BlackRock in August became the first foreign fund manager to secure China Securities Regulatory Commission (CSRC)’s approval to set up the first wholly-owned FMC in the country.
Having an FMC licence permits foreign asset managers to access China’s retail investor market. By comparison, a private fund management (PFM) licence – which many foreign fund managers now possess – enables foreign firms to launch onshore funds only to local institutional investors and high net worth individuals.
“The FMC application process is much more complicated and involves higher entry requirements [such as increased registered capital] compared to a PFM,“ Liu Shichen, the research head from Shanghai-based consultancy Z-Ben Advisors, told AsianInvestor. He believes that up to 10 foreign asset managers will be granted FMC licences in the next three years, a slower pace than the PFM permits handed out to date.
Fang Xiyuan and Ma Ben, partner and associate partner from McKinsey, respectively, also observed that the enthusiasm for mutual fund licence applications has been lower than expected. That means foreign institutions could take a long time to break even as they face potential operational challenges such as the ability to build up their distribution network quickly and finding the appropriate talent, they said.
Additionally, compared with local Chinese asset managers, foreign FMCs face longer internal compliance and risk management and reporting processes, said Liu. This could also hinder their response time to market moves and opportunities when making investment decisions, he added.
Melody Yang, a partner at law firm Simmons & Simmons in Beijing, told AsianInvestor that wholly-owned FMCs may also take a longer time to integrate and adjust their global operational and risk management practices to local standards. Both Fang and Ma at McKinsey also expressed concerns that foreign firms, even those with global success and track records, may find difficulties replicating their overseas models in China.
That said, Yang noted that international asset managers have longer histories and more industry experience compared to local Chinese rivals, enabling them to bring greater experience in handling black swan events.
MEASURING THE PROS AND CONS
Despite the challenges, many foreign asset managers remain keen for a slice of China’s rapidly expanding retail mutual fund sector.
As of June this year, China recorded a total of Rmb54.75 trillion ($8.15 trillion) of assets under management (AUM) of which mutual funds and private funds accounted for 30.8% and 27.2% respectively, according to the latest AMAC quarterly report.
China International Capital Corporation estimated that China will have an AUM of Rmb139 trillion by 2025. Consultancy Roland Berger expected the local mutual fund sector to grow by double digits over the coming decade as foreign asset managers are given broader customer reach.
Rivals Neuberger Berman and Fidelity International have also applied for FMC licences, while Vanguard is reported to have followed suit.
Bloomberg recently reported that Vanguard had returned about $21 billion in managed assets to government clients in China as part of its global shift to focus on funds for retail investors.
A spokesperson for Vanguard told AsianInvestor that the firm is “committed to growing in China, and is excited about the long-term opportunities to help Chinese investors achieve better financial outcomes”. It declined to comment on its recent move to cede control of managing government funds.
In late September, the passive investing giant appointed Luo Dengpan as its general manager in Shanghai. Luo was previously the chief executive of Chinese asset manager Dacheng Fund Management and prior to that, he was a senior consultant at regulator CSRC. The new appointment brings a former-regulator with China market experience to Vanguard.
Apart from establishing a new FMC, the route BlackRock has taken, foreign players do have other ways of entering the Chinese market.
While the government has provided no detailed guidelines yet, it is expected that foreign institutions with a wholly-owned PFM licence may be allowed to convert their business into a FMC at some stage in the future.
With no rules regarding the conversion in sight, Fang and Ma said some foreign institutions prefer to hold onto their PFM licences as it is a more cost-effective way to tap and nurture their China business.
Meanwhile, Yang observed some PFMs have been experimenting with private funds as they test the market’s appetite. They are aiming to diversify their investment product offering, with reaching a broader group of investors as their final goal, she said.
As of today, there are a total 30 registered wholly-owned foreign PFMs running private funds in China.