At the peak of the upheaval and trepidation caused by the coronavirus outbreak, one event in April came and went under the radar, garnering far less attention than it normally would have.
Well, on 1 April 2020, Beijing lifted the limits on foreign ownership rules, and the Chinese retail-fund market was officially open to global investors. This long-awaited milestone – with deregulation initially approved in 2018 – allows global companies to establish China-based subsidiaries or take full control of existing joint ventures with domestic companies.
Although foreign entities already operate in the private-fund market – with 26 wholly foreign-owned enterprises currently operating in China – the opening up of the retail market extends access to this sizeable segment of the asset-management industry. As a result, an opportunity boon awaits for fund managers, as the previously drawn-out process of establishing joint ventures with China-based firms has been supplemented with the ability to develop their own operations.
Why now and why so important?
The liberalisation of the Chinese economy has led to increases in both economic prosperity and openness to the rest of the world. And with this newfound wealth came the need to manage it correctly.
Consequently, China’s regulators, driven by an increasing need for alternative sources of investment and financing, have concluded that a further shift to financial openness must match domestic pension reform. As more and more of the country’s citizens start saving for retirement, the demand for wealth-management services has ballooned. Recent estimates for the growth trajectory of the Chinese asset-management industry place it as the second-largest globally by 2023, behind only the US. By the same year, Chinese household wealth is expected to grow to around US$35 trillion.
Although tapping into China’s market brings challenges, opportunity awaits those willing, and able, to expand into what amounts to the most significant single growth prospect around the globe. Major asset-management names have already taken advantage of the recent financial liberalisation to either buy out minority partners in their Chinese fund management joint ventures or apply to set up their own operations in the country. Others have, and will, inevitably follow suit, so it’s a matter of when rather than if China becomes the world’s dominant player in the asset-management space. With this transition on the horizon, what will the global asset-management environment look like in the near future? Will China shape the global market, or will the influence of established global companies sway the country’s asset managers?
Changing landscapes – how China will shape global asset management
Initially, it appears as if global trends are influencing China’s asset-management market more than the other way round. Management fees have dropped, and charges of less than or equal to 1% are commonplace, which has squeezed domestic fund managers’ profit margins. Moreover, passive investing has seen a considerable increase, with assets under management (AUM) increasing to over US$118.1 billion by September 2019.
However, a unique aspect of the asset-management industry in China – and in contrast to the US and Europe – is that the retail market accounts for roughly 60% of AUM. The mass retail market has been predominantly serviced by local operators, particularly banks, which operate as the primary distribution channel for asset managers. So, global managers attempting to establish themselves in China must either partner with reputable local entities for the efficient distribution of their products or services, or they will have to take on this role themselves, which may create problems. In particular, the lack of domestic consumer loyalty may be an issue. At the same time, it’s estimated that it will take upwards of one year to gain approval from the China Securities Regulatory Commission.
China’s fund-management industry has, in some ways, taken its cue from global peers; however, as the market grows into what may well be the second-largest in the world, the balance of influence could change. Chinese innovation may become the standard for global asset management. Already, the country leads the way in disruptive online financial platforms. Yu’e Bao, a fintech platform launched by Ant Group (an Alibaba affiliate), quickly became the world’s largest money-market fund (before recently being surpassed by two competitors). One of China’s other internet giants, Tencent, also operates WeChat Pay, a digital payments service that also runs its own money-market fund, Licaitong. Meanwhile, East Money, an online financial platform, recently overtook commercial bank ICBC as the biggest distributor of retail funds in China. These advancements have shown the role that technology can, and will, play in the part of distribution for asset managers.
Although the door to the Chinese financial industry is slowly opening for global participants, underlying risks remain. As you would expect, one of the main concerns is the lingering effects of Covid-19. The pandemic has placed a spotlight on the vulnerability of the global economy and the asset-management industry. Unprecedented recent drops in asset values have eroded the value of client portfolios, with a knock-on effect of lower management fees, putting a strain on revenues. Global asset managers will, therefore, have to carefully consider the risk and reward of expanding into China.
Opportunity knocks at the door…
The structural shift towards China is inevitable, and asset managers need to be prepared for the way the industry will operate in the future. Although the sector may be set for a bumpy road ahead as the impact of coronavirus is fully felt, the opportunity to carve out a niche within China cannot be missed, particularly in a world of squeezed fees and stagnating growth in more developed markets. Whether going it alone or partnering with Chinese institutions to tap into this relatively nascent market, asset managers must be prepared to pursue this opportunity.
Therefore, an understanding of China’s market and the opportunities it brings will be essential to maintaining a global presence and reputation. Asset managers must consider how they set up and maintain their operations in Asia as a whole. Effective communication across social media and through local intermediaries will also be required to gain a competitive edge. Marketing staff and investment writers who are proficient in Mandarin and understand the local market will thus not be merely an option, but a necessity. Establishing relationships, or utilising existing ones, with companies that can provide these services is an essential first step when expanding into China.
For more information about how Copylab can help the financial industry to communicate its messages clearly and with confidence, please contact John Holmes, our Strategic Director, Asia & the Middle East.
- A New Global Asset – China’s Rising Fund Management Industry - September 6, 2020