China Enters New Era of Greater Competition and Liberalization
September 10, 2020 — Singapore
Foreign managers now can access China via multiple routes; their entrance is likely to add to the already-intense competition
China’s asset management industry has entered a new era of reforms with an updated regulatory framework, more diversified competition, and expanded market liberalization. A series of rules and regulatory guidelines for different types of players following the introduction of the “super guidance” in 2018 has reshaped the industry landscape, presenting both opportunities and challenges. Along the way, foreign managers will be able to boost their onshore presence by setting up various types of financial institutions conducting asset management business.
Since April 1, 2020, foreign ownership limits on fund management companies (FMCs) and securities firms have been fully removed in China. Eligible foreign managers are now allowed to set up foreign-owned FMCs directly or convert their wholly foreign-owned enterprises (WFOEs) for private securities fund (PSF) businesses into public FMCs. J.P. Morgan has reached an agreement with its Chinese partner, Shanghai Trust, to increase its stake in their joint venture (JV) FMC, China International Fund Management, to 100% from 49% previously. Another three managers—BlackRock, Neuberger Berman, and Fidelity—have submitted applications for wholly foreign-owned FMCs. Cerulli understands that China is a long-term plan for many global asset managers; however, some could delay their market entries due to the COVID-19 pandemic, or because they are prudently evaluating the various industry guidelines.
In particular, the draft guidelines proposed by the China Securities Regulatory Commission (CSRC) governing FMCs in July 2020 are significant, as the previous “one minority, one controlling” shareholding principle could be replaced by the “one minority, one controlling, and one license” principle. This means a single financial institution can invest in no more than two FMCs and can only hold a controlling stake in one of them; in addition, it may have a controlling stake in another public mutual fund licensee. Cerulli believes the rule would further intensify industry competition, and the retail fund management business will then be further opened to banks, securities firms, and insurers, in addition to their affiliates’ existing asset management businesses.
Some foreign managers have already entered into JVs with local banks’ wealth management (WM) subsidiaries, securities firms, and insurance asset management companies (IAMCs), enabling them to possibly tap more opportunities. For those who have yet to enter China, their strategic considerations would include looking at whether wholly foreign-owned FMCs or other types of asset management institutions will best fit their China expansion goals.
“The draft rules in July state that a foreign shareholder should hold a good reputation internationally, with decent performance in assets under management, revenues, and profits. This could be interpreted as favoring for large global fund houses wanting to enter China,” said Ye Kangting, senior analyst with Cerulli, who leads the China research initiative. “Nevertheless, market penetration takes time, and foreign asset managers should leverage their global expertise while striving for localization by hiring local talents, as well as building track records, improving their brand awareness, and strengthening their relationships with both regulators and distributors.”