China’s regulation unification could benefit multi-asset fund managers

By Yoon Ng, 8 May 2017Market Intelligence | Investment Products

Regulatory risks in China are always high in the thoughts of foreign asset managers that want to enter the country to conduct business. In recent years, Chinese financial sector regulators have tended to adopt a wait-and-see stance on new products and innovations in the asset management space. They typically only make their moves to implement regulatory restrictions when they identify activities that could have a destabilising effect on markets.

This year, though, the Chinese regulators have become more proactive in overseeing the asset management industry. In February, local media reported that a People’s Bank of China (PBOC)-led internal consulting paper titled “Guiding Opinions on Asset Management Business Regulation of Financial Institutions” (Opinions) had been reviewed and received comments from the China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC), and other government agencies.

A high-ranking official from CIRC was quoted as saying that the PBOC, CBRC, CSRC and CIRC had been “intensely engaged” in a unified design for the overall regulatory frame of asset management businesses, and pointed out that due to the commonality of asset management businesses, such unified regulatory rules would be essential. The primary driver of this initiative is to focus on preventing systemic risks, rather than radically restructuring the financial regulatory framework.

The trigger behind this proactive stance is the explosive growth of shadow-banking sectors including banks’ wealth management products. According to the PBOC, the value of Chinese banks’ off-balance-sheet wealth management products exceeded RMB26 trillion (US$3.8 trillion) by the end of 2016, up 30% year-on-year. CBRC’s newly-appointed chief, Guo Shuqing, was quoted by the media in March as warning against the opaque nature of many investment products. “Some financial products...are invested in each other, with no one really knowing the underlying assets or the final destination of fund flows,” he noted.

Beijing’s emphasis on curbing financial risk in mainland markets can be a genuine source of optimism for foreign asset managers keen to pursue business in China. There will be a demand for financial products that are transparent, and in which risk controls are part of the fabric. This is where foreign asset managers could reap some benefits. Stringent risk controls are nothing new to them. Foreign asset managers are transparent in their operations, while risk management is part of their DNA. One such product we’ve identified is multi-asset funds. As opposed to multi-asset funds offered by Chinese managers which tend to be more focused on stock picking and thematic in nature, foreign managers are able to leverage on their experience in using more robust asset allocation and risk management techniques.

However, there are now more options available to foreign asset managers than ever to make their moves into China. The wholly-owned foreign enterprise (WFOE) model has emerged as the most popular route for foreign managers to enter the market and potentially create local products for retail investors in due time. However, it is important to realise that even after receiving the license, further approvals by the Asset Management Association of China (AMAC) is necessary. So far, only Fidelity International has received the approval at the point of writing. As many foreign managers have since realised, getting a quota/license is the start of a long journey to winning assets in China.

 

In fact, foreign managers which have successfully accessed demand for multi-asset funds have done so by working with local managers or distributors. They include partnerships with local managers, such as Efunds with SSgA, China Asset Management with Boston-based quant manager, PanAgora; or distribution via local wealth platforms like Noah Holdings and Creditease. Another potential opportunity set which is relatively untapped at the moment by foreign managers is Enterprise Annuity. Dominated by insurance-backed EA managers, foreign managers could attempt to work with the largest players in this space such as Ping An, Taikang and China Life.

The multi-asset fund opportunity in China is huge, worth US$241 billion to be precise, and double digit growth rates are projected in the next five years. The potential for growth is massive but with a mere 6% addressable to foreign managers at present, it is wise to be realistic about the opportunity set and timeframe. As the Chinese saying goes, “A single tree does not make a forest, a single string does not make a tune.” Finding the right local partner could go a long way in locking in this pot of gold.

 

For a comprehensive analysis of the multi-asset fund space in Asia including China, look out for Spence Johnson’s upcoming report, “APAC Multi-Asset Funds: A trillion dollar opportunity”.