When I led my first financial services delegation to China in 2005, I was surprised by the lack of progress being made within the local funds management industry. There was a lot of talk of future growth potential but a combination of confusing regulations, investor indifference and a somewhat closed environment meant that the industry was still in its infancy. This was not lost on our delegates from the wealth management sector who concluded that it was far too early to consider China as a serious business proposition.
How much has changed since then. In a recent report commissioned by Citi and published by local researchers, Z-Ben Advisors, entitled “China: The world’s best opportunity for asset managers?” they make a number of startling and eye-opening predictions and observations, including the following:
- China's mutual fund market is expected to triple in size to RMB6.8 trillion (approx A$1 trillion) in on the next three years (by 2015)
- The above figure is expected to double again by 2020
- Very few foreign asset managers have a definable China strategy when it comes to targeting institutional investors
- Whilst China represents 11% of global market capitalisation, the total amount of offshore money invested in China is very small (between 1% and 2% of total global portfolio allocations if Taiwan and Hong Kong are included) meaning that a rebalancing will inevitably take place and a likely ten-fold increase in future allocations to the Greater China region
The above should act as a 'wake up call' to all financial services companies, particularly with an interest in funds management, who now have a once-in-a-generation opportunity to significantly ramp up their engagement in China.
China’s local banks dominate the local savings and wealth management market due to their national reach, their size and scale and, above all, the high levels of trust they command from local investors. Whilst this is unlikely to change in a hurry, the Z-Ben report predicts that foreign banks will soon be given approval to promote mutual funds to domestic investors. This is a significant step forward and opens up numerous possibilities for the four largest foreign banks in China (Citi, HSBC, Standard Chartered and Bank of East Asia) but also smaller players and potential new entrants. China is a huge market with deep niches across different cities, regions and investor segments. As the report concludes “with distribution as one of the most lucrative elements in China’s funds management industry, the rewards for a commercial bank that manages to get a solution right are significant”. New entrants are advised to look for opportunities to innovate, disrupt and/or diversify the current offerings rather than adopting “follow-the-leader behavior”. This demands a fresh and new approach for China by Australian business leaders looking for growth in the current environment.
China has many challenges to overcome in building a modern, dynamic and diversified financial services industry to rival the rest of the world. At the same time, they have to grapple with the problems of an ageing population, an unfunded domestic pensions system, a non-convertible currency, restrictions on international capital flows and maintaining a sensible balance between the influence of local and foreign players. All of this at a time when global financial markets are in turmoil due to the aftermath of the global financial crisis and the debt problems in Europe.
Despite, or because of, all of the above, Chinese regulators are now moving swiftly and purposefully to introduce a number of changes, announcements and adjustments to open up, improve and diversify their financial services sector, including:
- The internationalisation of the RMB, with the ambition for the RMB to one day become an international reserve currency
- The expansion of cross-border investment programs – QFII, RQFII and QDII to encourage foreign players to play a greater role in the local funds management industry
- The introduction of programs to encourage pension savings, insurance investment and co-operation between financial firms
- The opportunity for foreign firms to establish their own 100% owned subsidiary (wholly owned foreign enterprises “WFOEs”) in China rather than relying on joint ventures or representative offices to serve their local interests
All of the above is designed to improve operational flexibility, access and business scope for foreign players and, at the same time, open up the market to those who have the ambition to play a direct role in the opening up of China’s global capital flows.
It’s now or never!
As the authors of the report conclude “you’ll never hear the word “easy” when describing the Chinese asset management industry”. The challenges are numerous, complex and often hard to predict in advance. However, with global financial markets in turmoil, resulting in bail-outs, job losses and an increasing cost of capital, China offers a potential which is unmatched anywhere else in the world. Foreign firms across the whole financial services value chain (banking, funds management, research, technology, software, back office etc.) who take the time and make the effort to do proper research, build local relationships, develop innovative solutions and target the right customer segments have the opportunity to participate in the world’s fastest growing market.
(This article was first published in AB+F magazine - July 2012)