Following a series of regulatory developments in 2019, foreign managers are expected to expand the scope of their onshore private fund entities, and enter China’s public market earlier and in a smoother way. Still, challenges exist in expanding into the domestic market, which is set to be more competitive and diversified than before.
These are some of the key findings of Cerulli Associates' newly-released report “Asset Management in China 2019: Setting the Right Strategies”. This research initiative is divided into three parts: an annual report and two supplementary reports during the year.
So far, foreign managers have been allowed to raise funds onshore and invest onshore only, via wholly foreign-owned enterprise (WFOE) private securities fund managers (PSFMs). However, in a proposed guideline released in January this year to merge the Qualified Foreign Institutional Investor (QFII) and RMB QFII schemes, quota holders will be allowed to invest in onshore private securities funds (PSFs), and appoint their affiliated WFOE PSFMs as investment advisors.
In June 2019, the China Securities Regulatory Commission (CSRC) announced a plan to allow WFOE PSFMs to invest in a broader range of securities via the Mainland-Hong Kong Stock Connect.
In July 2019, the State Council announced that the removal of foreign ownership limits on public fund companies would be brought forward to 2020 from 2021.
Eligible foreign managers will be allowed to convert their WFOE PSFMs into public fund companies, while allowing for continuity of business, according to the policy outcome of the 10th UK-China Economic and Financial Dialogue. Foreign managers will be able to have fully controlled mutual fund companies earlier, with lower transition costs, and retain minority ownership in their mutual fund joint ventures.
Many WFOE PSFMs have found it challenging to raise funds in China, due to their lack of brand recognition, onshore track records, and distribution network. As they look to target the retail market, they should be aware that more obstacles may lie ahead.
“Along with more players deepening their participation in asset management following the ‘super guidance’, China’s retail market has been evolving and diversifying,” says Miao Hui, senior analyst with Cerulli, who leads the China research initiative.
“For example, banks’ newly set-up wealth management subsidiaries will crowd out the mass-retail market and distribution space, and could eventually move into the institutional sector as they mature. In addition, many domestic managers have been trying to develop strategies quickly to gain first-mover advantages in the less-crowded passive space since 2018, despite the declining margins and fee pressure,” says Hui.
At the time of writing, almost all leading global asset managers have shown interest or have already ventured into China. Cerulli believes most of them have long-term plans to expand in the market, but the competition could be more intensive when they can officially join the retail space on their own.
According to Cerulli, they should continue to grow their PSFM businesses—which are crucial to establishing their onshore brands—by offering differentiated strategies, such as quantitative, multi-asset and multi-manager, and making early preparations to collaborate with banks and third-party online platforms in the public market.