“The deal will be credit positive for global asset management firms because it clears the path for entry into one of the largest and fastest-growing capital markets. Early movers with scale will especially benefit,” concluded Stephen Tu, senior vice president, financial institutions group at Moody’s Investors Services in a recent note.
Certainly, JPMAM paid a hefty 33% premium for the 2% stake auctioned by its joint venture partner, Shanghai International Trust. A filing a month earlier disclosed a net asset valuation from an external third party of RMB 9bn ($1.3bn) for the joint venture, but a minimum bid price for the stake was set at RMB 241m, valuing CIFM at $1.8bn.
Z-Ben, a Shanghai-based fund consultancy, noted that the price was “aggressive but not excessive” when compared with the long-term growth prospects of the joint venture, adding that JPMAM had seen a substantial rise in the value of its existing stake in CIFM, which has delivered annualised returns of about 33% since 2005.
JPMAM declined to comment about the price it paid, but the longer-term benefits could easily outweigh the short-term cost.
Planning for the long haul
“We have a fundamentally long-term approach to China and our increased involvement with CIFM, a cornerstone of our onshore presence for nearly fifteen years, advances our strategic plans,” a JPMAM spokeswoman told FSA.
At the end of 2018, CIFM managed nearly RMB 160bn on behalf of clients, she said.
Tu at Moody’s notes that “JPMAM’s product range of equity, fixed income and liquidity products will enable it to make a comprehensive, multi-asset entry into China’s domestic financial markets, with fixed income a particular strength”.
Moody’s also highlighted the four-fold growth in China’s domestic equity and bond markets during the past decade, and that both markets are now the second-largest country-level markets after the US, presenting a market opportunity for US financial institutions.
Estimates vary about the projected growth of the China onshore asset management industry. Casey Quirk conservatively projects that assets under management (AUM) will increase to $9.7trn in 2025 from $4.3trn now, while Boston Consultancy Group forecasts AUM surging to $14trn in six years time.
Over 20 foreign firms have joint ventures with China fund managers, and nine have 49% stakes in their enterprises. In April 2018, Morgan Stanley won an auction to buy an additional 5.5% stake to 43% in its joint venture, in a deal that made it the top shareholder of Morgan Stanley Huaxin Fund Management.
Fluid regulatory environment
However, whether these and other foreign firms choose to use joint ventures as their primary route into the vast pool of retail savers is unclear – not least because of the options opening for them amid a flurry of sometimes confusing regulatory initiatives.
Currently, overseas firms can set up a wholly foreign-owned enterprise (WFOE), which can apply for permission to launch private funds that can be sold to a restricted number of wealthy individuals. There are indications that these will be allowed to convert into public funds next year, and be sold to the retail market.
In addition, the Mutual Recognition of Funds scheme allows foreign firms to distribute their funds to China’s retail investors, but domestic investments cannot exceed 50% of the funds’ AUM.
However, the regulatory environment is fluid and, of course, foreign asset managers also have to formulate their China growth strategies amid constant uncertainties generated by the US-China trade dispute and other political tensions between the two countries.
JPMAM’s purchase of the controlling stake in CIFM on 5 August followed an announcement by China’s regulators a few days earlier that it will further liberalise its financial sector and open up its domestic markets to overseas financial institutions.
Among 11 new policy measures was the removal of limits on foreign ownership of fund management companies in 2020, one year earlier than planned.
At the same time the trade dispute rhetoric was being ramped up, with President Trump designating China as a “currency manipulator”.
Nevertheless, JPMAM hopes it will win by playing the long game.
Source: Moody’s Investors Service