As published on finance.yahoo.com, Monday 30 March, 2020.
China’s trillion dollar asset-management market opens wider this week, forcing BlackRock Inc., Vanguard Group Inc. and other global firms to make a strategic decision: Go it alone or work with an entrenched local partner.
While the further liberalization of the investment banking and money management industries in China has been overshadowed by the coronavirus crisis, wealth firms are nonetheless laying out plans to tap an overall market poised to reach $30 trillion in assets by 2023, according to consultant Oliver Wyman. For retail public funds alone, the market could reach $3.4 trillion over the same period, says Deloitte LLP.
Starting April 1, money managers can apply for licenses to set up wholly-owned mutual fund firms for the first time. Vanguard and BlackRock are among firms going that route, people familiar have said. Other options include boosting ownership of existing joint venture partnerships to 100%, as JPMorgan Chase & Co. plans to do, people familiar have said.
“With so many license options and changing policies, one of the biggest questions all foreign players face is where to allocate their resources,” said Jasper Yip, a principal in the financial services practice at Oliver Wyman in Hong Kong. “Asset management could be one of the most competitive sectors because of the opportunities.”
Here are the different paths asset managers can pursue in China and how some of them plan to proceed:
Wealth Management Subsidiaries
The China Banking and Insurance Regulatory Commission has been encouraging foreign asset managers to work with the wealth management subsidiaries of Chinese banks or insurers. Global players are expected to bring to the table product design expertise, while the Chinese firms provide a vast distribution network and relationship managers. BlackRock is in talks with China Construction Bank Corp. to set up a joint venture for a wealth management subsidiary, according to people familiar with the matter. Goldman Sachs Group Inc. has discussed a similar structure, people familiar have said.
“Chinese banks have great distribution channels and client relationships, but many of them lack expertise to create long-term investment products with sufficient risk controls, so they would benefit from working with foreign players,” said Harry Qin, a partner at PricewaterhouseCoopers LLP in Beijing.
This is the go-it-alone option. China is planning to allow applications for foreign-owned fund management licenses that would grant control of mutual funds. At least six firms, including BlackRock and Vanguard, have told regulators they intend to apply to the Chinese securities watchdog, people familiar with the matter have said.China regulators are trying to shift consumers away from shadow banking products underpinned by loans sitting outside banks’ balance sheets. That’s creating an opportunity for mutual funds that are expected to increase assets by more than 10% annually, according to Oliver Wyman, a unit of New York-based Marsh & McLennan Cos.The fund management licenses will allow global asset managers to sell mutual funds to individual investors. Some firms already hold private asset management licenses that let them target institutional investors and high-net-worth individuals, much like hedge funds.
“Wholly-owned fund management licenses will be one of the most sought after options for foreign companies,” said Rachel Wang, director of manager research for China at Morningstar Inc. “It allows them to offer more products and have a wide outreach to different types or sizes of customers.”
The potential is significant. Even with the market opening, foreign players are expected to only account for 6% of revenue generated in the asset management space by 2023, according to Oliver Wyman. Still, that small piece of the market could be worth $8 billion.
“Chinese regulators are very eager to attract foreign players in the financial sector,” said James Chang, China consulting leader at PricewaterhouseCoopers. “The government thinks the market is big enough for the local players to handle the competition.”
This is the legacy option. Several investment banks already have mutual fund joint ventures in China. With foreign companies now free to control operations on the ground, it’s unclear whether partnerships still provide value.