In April, China officially lifted the investment limitation for foreign fund management firms to 100% own a retail mutual fund business in the mainland.
The new opportunity is massive, as foreign players can now tap the country’s fast-growing retail mutual fund market. As of the end of August, industry assets stood at RMB 17.8 trillion ($2.62 trillion), which is 36% higher than RMB 13.03 trillion in December 2018, according to records from the Asset Management Association of China.
Previously, foreign asset managers were only allowed to sell onshore products to qualified investors, which include institutions and wealthy individuals, by setting up a wholly foreign-owned enterprise and applying for a private fund management license. So far, there are at least 30 foreign PFM license holders, including U.S., European and Asian firms, managing 90 onshore products, AMAC records show.
However, only U.S.-headquartered asset managers have so far taken advantage of the new regulations, with the largest global asset manager leading the race.
In August, BlackRock became the first foreign firm to receive approval from the China Securities Regulatory Commission to establish a wholly owned retail mutual fund firm, after it filed its application in April.
The initial green light from the regulator means that BlackRock would need first to set up its retail mutual fund unit, including hiring senior staff, before it can offer mutual funds to domestic investors. In addition, the company would need to complete the set-up within six months after receiving the initial regulatory approval.
Other U.S. companies that have filed an application to establish an onshore retail fund business include New York-headquartered Neuberger Berman and Boston-based Fidelity. As of this writing, both companies are still waiting for regulatory approval from the CSRC.
Vanguard is also planning to apply for a retail fund license. Just last month, it hired Luo Dengpan from domestic firm Da Cheng Fund Management to be its general manager for the yet-to-be-established retail fund company in China. Until the company is established, he will have the title of head of China fund management.
At the time of his hire, the company explained that before applying for the license, companies are required to hire certain key roles.
Separately, JP Morgan Asset Management is also expected to acquire 100% of its mainland joint venture firm, China International Fund Management. However, according to a statement from the Shanghai United Assets and Equity Exchange earlier this month, the U.S. firm will need to pay RMB 7 billion -- which industry players find expensive -- to buy out the joint venture.
While the opportunity is massive, competition is expected to be tight.
China’s retail fund industry already has 143 fund managers offering 7,497 products, according to AMAC records.
Most of the assets are also managed by a few players, with 60% of fund assets (excluding money market funds) concentrated at the top 20 largest domestic firms, according to data from Morningstar Direct.
Industry sources have often cited the difficulty of raising assets given the tight competition, and companies that are successful in fun raising usually have solid distribution partnerships, a good brand reputation or are backed by a bank.
That said, several foreign players have already made their brand known in China, having established their PFM businesses for some time, as well as building out their onshore investment capabilities.
Fidelity, for example, is one of the first managers to receive the PFM qualification in China. It first launched its PFM fund in 2017 and now manages four onshore products, according to CSRC data.
BlackRock, which launched its first PFM fund in 2018, manages three products under the PFM qualification. On top of its PFM business, the company also manages two qualified domestic limited partnership products to mainland investors. Having a QDLP license enables foreign managers to raise onshore capital from qualified investors to invest in offshore markets.
Neuberger Berman, meanwhile, manages seven PFM products and one QDLP fund.
Vanguard, on the other hand, does not manage PFM or QDLP funds in China. But it has an investment advisory joint venture firm with Ant Financial, in which the U.S. firm has a 49% stake.
Their efforts are now bearing fruit, as domestic investors are now becoming more aware of foreign brands. In a survey conducted by global PR and marketing agency firm Fleishman Hillard of 250 domestic individual professional investors, around 90% of them have invested in PFM or QDLP funds.
In addition, the prospect for overseas asset managers in the onshore retail market looks promising, as nine out of 10 investors are interested in onshore retail funds offered by foreign players, the survey shows.
Francis Acosta is editor of Last Word Media's Fund Selector Asia.
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