26
Citi Transaction Services | Citi OpenInvestor
reports suggest that some investors
— high net worth and institutional
investors in particular — have been
unable to rely on traditional sources
of returns. For many, these have come
from real estate and commodity-
linked investments (a not insignifcant
number of China’s high net worth
investors gained their wealth directly
from one of these two sectors).
Limited options and strong demand
have therefore unsurprisingly led
to a large number of methods to
transfer cash offshore, many of these
with questionable legality. From the
regulators’ perspective, sterilizing
these fows is a complicated issue,
as simply illegalizing such practices
has so far proven to be insuffcient.
Instead, creating an alternate channel
for the investments has emerged as a
popular option.
Opening of additional channels, to
allow for money to fow out in more
easily monitored channels, has
therefore become a priority in 2012.
Several localities have authorized
an increase on the per-person limit
of international currency they may
exchange annually, and Beijing
appears highly supportive of a
number of efforts — QDLP and the so-
called “mini-QDII” (not yet the offcial
designation) to enable an outlet for
this swath of money.
These problems are not going
to disappear anytime soon, and
that means a host of potential
opportunities for international frms.
Private banking services seem like
an obvious answer, and the fact
that many international operators
have quietly been investing in their
Mainland private banking practices
is hardly surprising
.
The Role of a Rep Offce
Many offshore frms, reluctant to
commit to an onshore platform due
to expense, utilize representative
offces to monitor the market and
provide a framework for developing
the relationships necessary to
consistently win mandates. The cost
of a representative offce has itself
increased over the past several years,
but still remains a key springboard
to a more permanent holding within
China.
Too often, representative offces are
misused, and established without a
clear goal in mind only in response
to orders from headquarters that
demand an increased China presence.
As a result, for some companies, a
Mainland representative offce is little
more than a glorifed travel agent
facilitating the moves of key personnel
from other global offces as they
pitch products and try to land assets
from major institutional investors.
Representative offces should not
just be used as a convenient stopgap
for establishing a more meaningful
presence.
The process by which a representative
offce is opened can affect whether or
not it serves effectively as a stepping
stone for other types of business
within China. Often a rep offce simply
functions as a personnel incubator,
and is closed when a joint venture or
other platform is established. This
often ends up being a relatively short-
sighted move, as a representative
offce provides a means to gather
information on the investment — to
conduct proper benchmarking and
research post-transaction. Such
information is extremely valuable
within China, as too often a joint
venture holding will itself serve as
the only conduit for information,
of potentially dubious reliability. In
addition, as will be touched upon
below, for those foreign frms willing
to assume slightly more business
risk, they are advised to forgo the rep
offce and, instead, establish a Wholly
Foreign Owned Enterprise (WFOE).
QDII Sub-Advisory
The amount of attention paid
to potential QDII sub-advisory
arrangements is hardly commensurate
with their actual importance in the
cross-border landscape. Initially,
numerous foreign frms viewed
QDII as another platform whereby
domestic asset managers would
require additional management
expertise, which they could charge
for. While part of this assumption
proved true — Chinese managers were
indeed inexperienced when operating
in offshore markets — many of them
simply chose to focus their QDII
offerings on Hong Kong, leveraging
their expertise in the domestic
markets to focus on cross-listed frms.
Such strategies have had the
impact of making QDII an extremely
unattractive segment, yet from the
domestic asset managers’ viewpoint,
the expense of developing expertise
in other global markets, or paying
for that expertise outright, means
that the paltry amounts of AUM that
QDII funds typically raise can hardly
be expected to cover such costs.
At present only a handful of QDII
funds utilize third-party advisors
and barring a collapse in A-share
markets, with rapid growth in other
equity indices, we do not see this
situation as likely to change in the
near future.
One possible caveat is if domestic
investors demonstrate an interest in
diversifed offshore holdings, to which
fund managers are able to respond.
The gold fund launched by Lion FMC
is one example, as there may be
strong reasons to invite specialist
frms in to help with the development
of highly nontraditional products.
This, unfortunately, is only likely to
occur on a case-by-case basis and as
a result, is unlikely to transform the
overall industry.
Accessing Mainland Investors
By now it should be clear that
accessing all types of Chinese
investors is an extremely complicated
prospect, and target client segments
need to be prioritized based upon
whether or not a frm actually has the
ability to access them. The types of
“Many offshore frms, reluctant to commit to an onshore
platform due to expense, utilize representative offces to
monitor the market and provide a framework for developing
the relationships necessary to consistently win mandates.”