So far 12 foreign asset managers, including some of the world's biggest, have moved to set up a wholly-owned business in China, but not all of them are seeking a private fund company licence. 

Index fund giant Vanguard, for instance – the second largest investment house worldwide, with $4 trillion under management – is not believed to have done so, despite the fact that it received a licence for an onshore wholly foreign-owned entity (WFOE) late last year.

This is probably because passive-focused managers want to skip the currently available entry route of setting up a WFOE to run a private fund business. The likes of Vanguard are likely waiting for direct access to the mutual fund market, said a new report* due for release today by Standard Chartered and consultancy Z-Ben Advisors.

Vanguard declined to comment on whether it would seek a private fund company licence.

Mutual funds the ultimate goal

The point is that most asset managers do not see China’s private fund market as the ultimate goal, said the report. “The $1.3 trillion (Rmb9.1 trillion) public mutual fund market is the biggest prize.”

Justin Ong, Asia-Pacific head of asset and wealth management practice at PwC, agreed: “A WFOE is for actively managing portfolios on the ground – so it isn’t the first thing a passive manager would think about in China."

A private fund company can apply for a mutual fund licence after three years, if their average AUM has been at least Rmb2 billion. But Shanghai-based Z-Ben does not believe that the private fund industry will be the only route into the mutual fund industry.

“Following foreign-ownership reform, we believe foreign managers will be able to gain direct access to the mutual fund industry without first having to run a private fund,” said the report. “This is something that regulators will likely have to address as first-mover foreign managers approach the three-year mark in the private fund industry.”

But while waiting on the sidelines for official guidelines is understandable, there are risks of doing so, argued the paper: being a first mover allows a manager to influence industry standards.

Z-Ben pointed to Fidelity being the first to register to launch a product in China’s private fund industry, suggesting that this will set the benchmark for other foreign managers wanting to do the same.

What’s more, said the report, “the career risk aspect of China expansion has switched. Before, making the move into China may have seemed like too much of a risk to take, especially if it could affect the next promotion. Now, it’s a case of not risking competitors gaining too much ground in China. Managers late to the game will find their competitors have already made steady progress.

Nevertheless, added the paper, "the progress made by first-movers in China has allowed followers to make similar gains in a quicker amount of time".

Outbound investment set to restart?

The report also addressed the issue of outbound investment from China. Mainland demand for foreign assets has been rising, but is hindered by capital controls that have tightened since early 2015.

The last quota under the qualified domestic institutional investor (QDII) programme was issued in early 2015. This is in spite of high demand for offshore investment; the fourth quarter of 2016 saw 13 new QDII products launched, raising nearly Rmb5 billion, beating the previous record of seven new funds set in Q3 2011.

Z-Ben believes outbound restrictions will start being relaxed again this year. For instance, talk of a restart of the qualified domestic limited partnership (QDLP) scheme picked up steam in the second half of 2016. And it was explicitly included in foreign manager investment guidelines early this year. 

But QDLP, which allows the set-up of feeder funds to raise renminbi to invest into overseas products, is a relatively niche channel. It is the restart of QDII that is more eagerly awaited, noted the report. “Our expectations are that QDII, in either its current state or reinvented, will begin again after QDLP’s restart.”

* China’s Broadening Landscape: Thoughts for Asset Managers in 2017.