China relaxes JV ownership rules

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China’s securities regulator has relaxed joint venture ownership limits for foreign asset managers, further opening the domestic asset management industry to foreign firms.

China relaxes JV ownership rules

The China Securities Regulatory Commission (CSRC) over the weekend gave formal authorisation for foreign players to apply for a 51% ownership in a Chinese fund management firm, according to guidelines (in Chinese) released by the regulator.

Until now, foreign players could only own up to 49% in a Chinese fund management firm. The new limit applies to existing and new joint ventures.

Furthermore, the CSRC announced plans to remove the 51% cap in three years, allowing 100% ownership of domestic asset managers by a foreign firm.

Having a stake in a Chinese fund management firm allows foreign players to participate in the country’s RMB 10trn ($1.58trn) retail asset management industry.

A number of asset management giants already have joint venture firms in China. Of the 50 largest global asset managers, 22 have joint ventures. Nine of them, including Allianz GI, JP Morgan AM, BNP Paribas AM and UBS AM, have the maximum ownership stake of 49%.

China first announced that it would ease foreign ownership limits for fund managers in November, but no details or timelines were available at that time.

Challenges

Although the new regulations present new opportunities, big challenges await foreign players that want to enter China’s retail market, according to industry sources.

The difficulties include distribution and competition, as China’s distribution channels for traditional equity and fixed income funds are dominated by mainland banks, which are commission-driven, Charles Lin, Vanguard’s Hong Kong-based country head of China, told FSA in an earlier interview.

“[The commissions] will create a conflict of interest between investors and the distribution channel,” he said.

Echoing Lin, Matthew Phillips, PwC’s Hong Kong-based financial services leader for China and Hong Kong noted that some challenges stem from the domination of the Chinese financial industry by only a few large institutions.

“Foreign players that have already partnered with the leading banks and insurers have found a significant degree of success and have built very sizeable businesses that are profitable,” he said. “But there are relatively few opportunities to do that because there are only a few large banks.”

Challenges do not only confront new entrants, but also those that already have an asset management joint venture in China.

Lin said local players believe that the fund management business is a “great business”, and thus foreign firms with joint ventures must convince the management of the partner firms to accept a majority ownership.

“I don’t think that most of the local shareholders would give up control in their joint venture,” he said.

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