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China: The World’s Best Opportunity for Asset Managers?
| Expanding Internationally
access that an international frm can
gain are therefore worth examining.
So far we’ve covered the various
segments of the industry without
explanation of how they can be utilized
to grow a frm’s onshore presence.
For fund management companies, the
maximum shareholding possible by a
foreign frm is 49%. Today, however,
this can only be achieved through
setting up a “greenfeld” (start-up)
joint venture, which is a complicated
endeavor. There is the option of buying
a minority stake in a Chinese fund
manager, but that comes at a price,
with relative pricing typically in the
range of 7% or 8% of AUM.
The only international frms that have
higher percentages in their holdings
are those that entered the industry
relatively early; barring exceptional
circumstances, positions above
25% appear unlikely in the next
several years.
With fund managers becoming
much more diffcult access points to
secure, many offshore players are
considering investments in other
platforms. Trusts have recently
become much more popular, given
their industry fexibility. Moreover,
international frms are allowed to
hold up to 20% of trusts’ shares.
Valuing a trust company is much more
diffcult, however, given the variance
in the frms populating the market.
Some are well run, but many are still
recovering from overexpansion and a
reliance on bancassurance products.
Due diligence is therefore an
absolute necessity for any company
considering acquisition of a trust
platform.
Brokerages and insurers are also
becoming more popular means of
accessing China’s fnancial industry,
with insurance companies likely to be
the next wave of offshore acquisitions
or partnerships.
The handful of frms
that are able to maintain a position
in multiple ownership stakes and
licenses will soon fnd themselves
in enviable positions when
developing their onshore platforms.
Utilizing one platform to assist
another has become an increasingly
important method of overcoming
some of the market challenges that
currently exist.
The one platform that continues
to be vastly underappreciated by
the foreign asset management
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20
40
60
80
100
120
140
160
3Q05
3Q06
3Q07
3Q08
3Q09
3Q10
Exhibit 18: Bancassurance Product Sales, 1Q05 – 4Q10 (RMB bn)
Note: Data disclosures ceased after 2010, and were intermittent prior to that period.
Bancassurance sales demonstrate that when the incentives are aligned properly,
the banking channel is by far the most effective means of accessing investors
community is the Wholly Foreign
Owned Enterprise (WFOE). While there
is no debate whatsoever as to whether
such an entity can be established, the
debate rages on — facilitated by the
international legal community — as
to what activities a WFOE platform
is actually allowed to undertake. A
largely unexplored option is using
a WFOE registration as a base for
developing an asset management or
advisory business. At present, the
WFOE license does not allow beyond
much more than setting up an offce
and providing a framework to hire
employees directly as well as invoice
within China, and transfer money back
overseas. Such a setup provides an
extremely fexible and potent platform
when moving forward with business
expansion within the Mainland.
A WFOE can be used as a stepping
stone to developing an advisory
business focused on asset
management, or client servicing. As
a result, it is highly complementary
with having an ownership stake in
a joint venture, as opportunities for
cooperation between the two holdings
become much easier.
Best Foot Forward: Final Thoughts on
Opportunities for Asset Managers
When considering what approach
to take to China’s fnancial markets,
it’s important to remember that
regulatory changes rarely beneft
the newly arrived. While frst movers
typically have an extremely strong
advantage, regulatory changes — one
of the prime levers of growth — rarely
occur in isolation or without warning.
Major policy developments are
typically implemented gradually, with
geographic restrictions or a carefully
selected set of frst-run participants.
For frms looking at one particular
aspect of business development, it is
possible to structure a market entry
effort that maximizes the chance of
success.
There are bound to be setbacks.
Nonetheless, the need to further
liberalize China’s fnancial industry is
clear to central authorities. Without
a more diversifed set of options
for investors, domestic buyers will
Source: Z-Ben Advisors, CIRC