The marked lack of interest shown by UK fund managers to do more business in China threatens to jeopardise Sino-British trade relations, according to those most closely involved in negotiations with Beijing.
At a time when the UK is supposed to be exploring post-Brexit deals with non-EU partners, an analysis of fund groups seeking to move into China via the WFOE route, or applying to gain majority ownership of joint ventures, shows a surprising lack of UK fund managers in the mix.
Their absence is depriving asset owners of potential expertise from a large and experienced group of institutions.
For asset managers, the wholly foreign-owned entity (WFOE) set-up in Shanghai's free trade zone has become the preferred option for market entry into China. At the same time, five global investment banks – UBS, Nomura, JP Morgan, Credit Suisse and Morgan Stanley – are officially working to obtain 51% domestic Chinese securities licences.
Shanghai-based China-entry consultant Z-Ben Advisors has assessed the status of fund groups with WFOEs at various stages of development (see table below). As it stands, very few UK fund managers feature in either camp.
That British fund groups lag their US peers in China is frustrating for those promoting British trade and investment, not simply because of the UK's historic advantages in financial services but also because Beijing has granted London favourable status as a hub for renminbi internationalisation and financing for the Belt and Road initiative.
Tom Brown, global head of asset management at KPMG in London, described it as "a massive missed opportunity for the UK industry.”
“The frustration is that the stars are aligned but the industry isn’t seizing the moment," he told AsianInvestor. "With Brexit, there is a huge impetus from the UK government for UK businesses to develop trading relationships with the big non-EU economies like China. With the current difficult trading relationship between China and the US, the time is ripe for the UK to step in.”
Sherry Madera, special adviser for Asia with the City of London Corporation, which administers Europe’s principle financial hub, confirmed that this is a live issue for them.
She told AsianInvestor that for the last 10 years, “we have been bashing away at China saying what we want is open access to your market for our asset managers, or a lifting of the ownership cap and being able to function on a par with domestic players".
And in November 2017 those efforts made some headway as the Chinese government announced plans for a wide-ranging reform of financial services that included many of the changes being pushed for by the British.
British fund firms have been slow to react though.
“It’s now almost a year on and I think that it’s really showing up the fact the UK asset managers – other than the first few movers like Aberdeen, Man Group and Fidelity’s UK operation – are not jumping in there very quickly," Madera said.
BLAME IT ON BREXIT
The reason for the UK’s relative no-show is, Madera suggested, to do with Brexit.
“The asset management community in particular has been quite taken up by the question of what is going to happen post-Brexit, particularly in relation to mutual recognition, distribution, domicile, and key people. All of this has been top-of-mind for asset managers,” she said.
Brown’s reasoning for the slow uptake is “a lack of awareness of the opportunities and a lack of appreciation of the pace of change in the opening up of the Chinese market, especially in the pensions savings market.”
He also pointed to a lack of confidence among UK fund groups in executing successfully on the ground in an unfamiliar market: “UK groups often cite the unfamiliar legal system and unpredictable changes in policy as reasons for their caution.”
Brown said more needs to be done at a government-to-government level, as well as at an industry level, to encourage and support UK fund groups to participate in the Chinese market.
In April 2018 at the annual Boao Forum, President Xi Jinping and the governor of the People's Bank of China, Yi Gang announced plans to open up the financial services sector as part of an extensive reform programme.
“That was very exciting for someone like me who has been pushing for an opening up of the market,” Madera said. But in the nature of reform in China, nothing ever goes as planned and, having come back from China last week, she reported "a definite slowing down of that reform momentum.”
A key takeaway from her visit was that “China is pretty distracted and it is impossible to avoid the question of the trade war with the US. Obviously now the trade war is putting a huge amount of pressure on foreign exchange and on interest rates. And that’s affecting the thinking at the PBoC and with regulators in central government.”
In that context, the fact that the UK firms aren’t coming in droves to talk about asset management in China is not a major issue at the moment. But Madera said “if this continues to be the stance of UK fund managers, it will prompt the question from China: ‘We are giving you what you said you wanted, so why are you not here?”
The message now to the UK financial services community is take this opportunity to catch up.
As Madera put it, “maybe this is a good time to pull China out of the ‘too difficult’ box and determine what might be the best strategy. Go and see Amac [Asset Management Association of China] and the CSRC [China Securities Regulatory Commission], study those rules that were just published about harmonisation across the entire asset management community in China, which will stop some of the regulatory arbitrage, and use this period of China’s focus in the US trade war [to] assess the way to put our best foot forward for our UK firms."
That said, it's not just the British who are being slow to wake up to the opportunities in China, according to some in the industry.
Peter Alexander, managing director at Z-Ben, told AsianInvestor that in his estimation, “the lack of urgency is across the board, both in Europe and the US”. He also pointed to “sadly a low level of understanding at HQ. The majority of global managers remain at the ‘internal debate on China’ stage.”
|THE CURRENT WFOE LANDSCAPE|
|Private fund manager WFOE registered with AMAC|
|APS Asset Management||Singapore|
|AZ Investment Management||Italy|
|Fullerton Fund Management||Singapore|
|QDLP manager WFOE registered with Amac|
|Nomura Asset Management||Japan|
|Oaktree Capital Management||US|
|Och-Ziff Capital Management||US|
|Dual-track (private and QDLP)|
|Aberdeen Standard Investments||UK|
|Value Partners||Hong Kong|
|Licenced but not yet registered with Amac|
|Axa Investment Managers||France|
|BEA Union Investment||Hong Kong|
|Income Partners||Hong Kong|
|UBP Asset Management||Switzerland|
|VanEck Investment Management||US|
|Source: Z-Ben Advisors|
Look out for a follow-up article tomorrow that will take soundings from fund managers who are growing their China business and the challenges they face.