SSgA's mooted China exit flags wider tensions

State Street Global Advisors’ reported move to exit its mainland joint venture is seen as highlighting a difference in approach to risk control between the US firm and its Chinese partner.
SSgA's mooted China exit flags wider tensions

Another day, another fund house looks to ditch its joint-venture in China. Such relationships often prove difficult – particularly for the offshore partner – and tensions seem to be increasingly coming to a head.

The latest example to emerge is State Street Global Advisors (SSgA), which is reportedly seeking to offload its 49% stake in SSgA Fund, just a year after it was set up. The US firm is said to be waiting for a suitable price and may sell to its Chinese partner, Zhongrong Trust.

This comes soon after reports that BNY Mellon plans to exit its mainland JV, BNY Mellon Western Fund Management, by disposing of its stake to Shanghai Leadbank.

Beijing-based SSgA Fund was set up with registered capital of Rmb300 million ($48.2 million) and had AUM of Rmb450 million as of the end of 2013, according to Haitong Securities.

SSgA’s decision to exit the partnership is largely because the partners cannot agree on the direction of the business, reported Chinese daily the Securities Times, citing people familiar with the matter.

Zhongrong Trust wants to focus on segregated account (SA) subsidiaries, a trust-like business, to leverage its existing network. But SSgA is thought to feel such business is too risky.

“Clearly this sort of business falls well outside the mass-retail targeted fund or asset management activities which basically all foreign firms view as the reason for establishing a JV,” said Shanghai-based consultancy Z-Ben Advisors.

(That said, on the launch of the JV last year, Ting Li, head of Asia ex-Japan for SSgA, told AsianInvestor that the venture would seek to avoid over-concentration only on mutual funds.)

SA subsidiaries usually engage in product-packing and structured finance business, which is widely viewed as shadow banking. The registered capital for such subsidiaries usually ranges from Rmb20 million to Rmb50 million, which is seen as too low to cover a default.

Risk control is one of the most common areas of conflict between foreign managers and their local partners, which is believed to be the scenario that played out between SSgA and Zhongrong.

“Foreign shareholders of JVs which either refused to support the establishment of a subsidiary or demanded that a subsidiary follow extremely tight risk controls are now finding themselves at a major point of contention with their local partner,” writes Z-Ben.

But the core problem is difference in strategies. “The real issue at hand is how the rapidly evolving marketplace is leading to operational and strategic differences between a JV’s foreign and Chinese partners,” says Z-Ben.

The market consensus is that there will be more exits, as European shareholders of JVs start looking to sell their stakes. No deals have been mooted formally, but a lot of informal discussion is taking place, says a Hong Kong-based consultant.

There are various reasons for foreign managers to exit China he adds, such as high distribution costs and different perspectives on the market. Some managers feel they don’t understand their business partners until they work together.

Another issue is that the strategic value of mutual fund licences has diminished, said Zhang Howhow, research director at Z-Ben. The China Securities Regulatory Commission (CSRC) last June revised the rules to allow securities firms, private funds and insurance companies to enter the mutual fund industry for the first time.

“China’s asset management landscape has changed since the revised fund law came into effect,” added Zhang. “Foreign managers have alternatives to enter the asset management industry apart from [gaining] a mutual fund licence.”

SSgA declined to comment when contacted by AsianInvestor.

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