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China: The World’s Best Opportunity for Asset Managers?
| Expanding Internationally
last ten years and consider the pace
at which China has already developed
its fnancial markets. Beijing has
committed to making the renminbi
(RMB) a more internationally relevant
currency and this requires more
fexibility in capital fows. When these
types of changes occur, however,
the rewards go to those most active
in the market at the time. Anecdotal
reports suggest that most major asset
management companies are keen to
gain additional China exposure, but
the expenses needed to do so have
so far served as a barrier, particularly
for those not yet in the market. As
global operating budgets begin to
recover, we expect to see a renewed
push into the region, with China as a
focal point for rounding out the types
of allocations demanded by global
institutional investors.
For the past several years, the
only direct method to gain A-share
exposure has been through the
Qualifed Foreign Institutional Investor
(QFII) program, a scheme that allows
foreign frms to obtain RMB to invest
directly in onshore markets. The
securities regulator, CSRC, approves
applicants and SAFE allocates quota,
usually in the range of USD100 –
200m, which can then be transferred
into RMB. One of the major goals
of the program has been to provide
liquidity to China’s capital markets,
as long-term international investors
are viewed as being a stabilizing
element. While this is the case to some
extent, the total amount of assets
that come through the QFII program
is still extremely small (accounting
for barely 1% of A-share market
capitalization). Asset managers that
use QFII to create fund products have
also had problems realizing strong
returns (at least those that report
their performance data). Part of this is
likely due to the size of the individual
awards. If a frm obtains only
USD100m in quota, it becomes a fairly
hard sell to set up a dedicated A-share
research team, especially one based
in China.
Expense and inexperience
in operating in the environment
have meant that passive allocations
are the preferred structure for QFII
offerings. This factor, combined
with limited specialization toward
A-shares, has created an upper lid
on returns.
Exhibit 15: China’s Fundamentals vs. Portfolio Allocations, 2010
& 2020 (estimate)
Signifcant portfolio rebalancing will be essential if asset allocations are to refect
macroeconomic realities compelling opportunities
0%
5%
10%
15%
20%
2010
2020e
% of Global Market
Capitalization
% of Global GDP
MSCI ACWI Weighting
Investors’ Actual
Weighting
11%
9%
9%
12%
2%
0.1%
20%
17%
Source: Z-Ben Advisors, MSCI
In actuality, QFII’s lifespan has
encompassed an extremely volatile
and arguably painful period for
domestic markets. Demand may have
been limited even if access channels
were expanded. Should another run-
up in equity prices occur (as happened
in 2007), frms with existing QFII
quota will fnd themselves in enviable
positions.
It is with this in mind that the recent
expansion of the QFII program is of
considerable interest with the CSRC
announcing nearly 30 new licenses
to participate during the frst four
months of 2012, which is the same
number awarded in all of 2011. At
the same time, it was announced
that the total permissible quota cap
of USD30bn would be increased to
USD80bn, indicating that CSRC and
SAFE are set to continue with an
aggressive opening up of the QFII
program. For the frst time since the
QFII program was introduced in 2003,
there is a real alignment of interest
between the regulators and foreign
assets managers. It is, however, worth
noting that competition for asset
fows will increase now that Chinese
asset managers can target such fows
through the recently introduced RQFII
(“RMB Qualifed Foreign Institutional
Investor”) program.
“Fundamentally, we expect that in the coming decade Greater
China will no longer be viewed simply as an element of
emerging market exposure, but rather as a distinct asset class,
with Chinese A-share investments making up a signifcant part
of this allocation.”