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More foreign AMs entering China

Chinese investors are looking at offshore products for diversification and, in response, foreign asset managers are entering the mainland, according to consultancy Z-Ben Advisors.

While many global firms have already entered the China market, they are typically looking to expand operations, Chantal Grinderslev, director of operations for the Shanghai-based firm told FSA.

According to Z-Ben’s report on China’s top foreign asset managers, released in April, JP Morgan, UBS, BNP Paribas, Invesco and Schroders were ranked the top five.

 “There is new interest from smaller firms in the US in sourcing [onshore] investors, for example, the high net worth individuals in China.”  

Some of them don’t even have a regional presence and are not putting in onshore infrastructure, but only want to deploy some sales people on the ground, she said.

Other Western firms are considering establishing a wholly-foreign owned enterprise (WFOE) in Shanghai, or reaching mainland investors by launching products through the Mutual Recognition of Funds (MRF) scheme in Hong Kong.

But it might prove challenging. Most onshore investors favour property as a stable and tangible holding, she said. It will require investor education to change the mindset of the majority and have them warm to alternatives products such as foreign mutual funds.

In fact, the QDII quota, which acts as the most common avenue for outbound investments, is still under-utilised, despite growing demand for foreign products, she said.

She said some foreign asset managers have failed in China even though they were committed to developing their mainland business.

Some “made the commitment but didn’t put enough resources”, and had a long wait because infrastructure, such as research team, takes time to build up.

Others were actually moving too quickly and had to shut down the WFOE and start over again. If an initial business strategy for a firm using a WFOE later changes, the firm may have to shut down the WFOE and start anew, she explained. She declined to provide firm names.

The WFOE has been getting more popular since autumn last year after the push by the Shanghai government, she said. The latest upgrade of the WFOE could be a game-changer because it is expected to finally allow overseas managers to run money onshore and create products without quota restrictions, she said.

US Bridgewater Associates, for instance, became the first foreign hedge fund to set up a WFOE in March.

Questioning the yuan

Foreign asset managers planning to invest in China A-shares are likely to wait until next year for more visibility on the government policy in regards to the currency.

“[The yuan] is one of the deal breakers and central to a lot of different activities by foreign investors,” Grinderslev said.

Last August, the Chinese government stunned global markets by its surprise, one-off 3% depreciation of the yuan. 

“Interest rates in the US will change, and what does that imply for the RMB? Will the government allow the currency to depreciate further, or infuse stability in terms of injecting money into the market? This is the question that people are looking into, and it could influence their views on China at the start of next year.”

MSCI marketing play?

Z-Ben does not expect A-shares to be included in the flagship MSCI Emerging Markets Index in June, since many foreign asset managers the index provider needs to consult still don’t have a China strategy.

If the decision to include A-shares comes one year later, it won’t make much difference to the markets, Grinderslev said.

Other programs that aim to open up Chinese stock and bond markets, such as the anticipated Shenzhen-Hong Kong Stock Connect and details on expanding foreign investor access to China’s interbank bond market (CIBM), are expected to be announced this year.

The actual timing for these initiatives, however, is more likely to be “a marketing play”, she said, which might be used to distract people from a negative MSCI decision.

For instance, the CIBM guidelines were supposed to be released in February, weeks after the iitial announcement to further expand the foreign investor base, she said. The vague terms, such as  “medium and long term institutional investors recognised by the PBOC including senior funds, charity funds and donation funds”, needs further clarification.

HSBC Global Asset Management expects the CIBM to become the main investment channel used by foreign investors.

Grinderslev said conversations with foreign asset managers and investors about the CIMB center on liquidity concerns. “Most foreign firms have similar opinions toward China: if they get scared, they can’t sell it and they are stuck with the holdings. No one wants to have a position that they can’t get out of.”

Another concern is that the current yield could be diminished by the currency risk on top of the credit risks, as many overseas investors are very nervous about the shadow banking sector. These risks are difficult to evaluate, she added.

Part of the Mark Allen Group.