Foreign firms scramble in fast-changing China

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Aberdeen Standard Investments is the latest wholly-foreign owned enterprise manager to expand into advisory services in China.

WFOEs operating a private fund management (PFM) business or a qualified domestic limited partnership (QDLP) may not yet be profitable, according to Yoon Ng, Singapore-based director for Asia-Pacific insights at Broadridge Financial.

Running a WFOE can be very expensive, especially with the costs associated with hiring investment professionals.

“I don’t think either the PFM or QDLP businesses are profitable yet,” Broadridge’s Ng said at a recent media briefing in Hong Kong.

“Most of them realise that the three-to-five year horizon has gone to five-to-10 years to reach a breakeven point,” she added.

A PFM licence allows foreign managers to offer onshore funds to domestic investors, while a QDLP licence allows managers to raise onshore money to be invested in offshore products, within allowable quotas. Only qualified investors, including institutional and high net worth investors, are allowed to invest in both products.

A big challenge is gathering assets, given the short track record of foreign managers in China, she said.

In addition, she believes that most investors are institutional and it takes more time to attract high net worth individuals.

“At this moment, it is [very difficult] to get money straight from [individual investors] without adequate brand building,” Ng said. “A lot of the current funding now is coming from securities companies and banks [for the discretionary portfolios they manage for their clients] or pure institutional investors.”

QDLP more difficult

Running a QDLP business is tougher than a PFM business because it draws money out of the country, Ng noted.

“The QDLP is a system that sits in a structure which funnels the assets outside of China. So it has to go through multiple layers, including fees, before you can get the money out.”

She added that fees can be high, especially since retrocession fees (distributor clawback fees) have increased with the rise of domestic and foreign players entering China’s asset management industry.

Most distributors, particularly the large banks, usually prefer to work with established domestic brand names, she added.

That said, Ng provided some solutions to potentially tackle some of these challenges.

One of them is distributing QDLP products through the newer and smaller wealth managers, such as Credit Ease and Noah Holdings. Unlike banks, these distributors are more open to working with foreign managers.

“These smaller players also usually cater to a select group of high net worth individuals, who are looking to access offshore products that are higher yielding. These investors already have an account with a banking channel, but these banks usually offer the more traditional domestic products,” she explained.

Noah Holdings does offer QDLP products to its clients, and has also become one of the largest QDLP fund distributors, William Ma, Hong Kong-based chief investment officer, said previously.

Around 30% of the firm’s assets in its discretionary portfolio offered to Chinese investors are in QDLP funds, Ma said.

Advisory angle 

A number of WFOEs have also started to expand their business scope outside the private funds space to include investment advisory services to onshore clients.

The Asset Management Association of China awards the advisory qualification, which basically enables the foreign manager to advise domestic fund management firms and distributors on specific investment products.

Only a few foreign managers have received the qualification, the latest being Aberdeen Standard Investments, which received its licence this week, according to a statement from the firm. Blackrock also received the same qualification last week. Neuberger Berman and Fullerton Fund Management were the first foreign PFMs to receive such licences.

Although few foreign firms have moved into advisory, the development is not new in China, Hui Miao, senior analyst at Cerulli Associates, said previously.

Guidelines were issued in October 2016, but certain requirements such as holding a registered PFM licence for one year had to be fulfilled first.

A lot of laggards

Broadridge’s Ng believes that China’s asset management market has become too large for asset managers to ignore.

“If there is one market in the next 10-50 years that could totally change your business, it is going to be China.”

However, those entering the market should be clear on strategy because there are now multiple ways of accessing domestic investors.

“The access points in operating a business in China have increased. But being the first mover may not be much of an advantage now in China, because of the fast-changing regulatory landscape. What has become clearer now is that there are going to be a few winners and a lot of laggards.”

For example, Ng cited the recent change in rules that will allow PFMs to be converted into a public fund management company (FMC) without having to shut down the PFM. An FMC allows managers to address the RMB 13.9trn ($2trn) retail fund market.

Market consensus expected the conversion to FMC in 2021. However, regulators this week made a surprise announcement allowing foreign firms to own a 100% stake in an FMC next year, which effectively makes a conversion unnecessary.

“If you have a PFM licence and you can convert into an FMC, you may find yourself in a conundrum because now you can [instead directly] apply for a majority stake or go 100% [in an FMC],” Ng said.

“You really have to be decisive if you are looking to tackle the massive domestic retail market,” she added.

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