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JPMAM takes big step into China’s fund industry

JP Morgan Asset Management (JPMAM) is set to become the first foreign company to hold a majority stake in a Chinese mutual fund business.

A 2% holding in JPMAM’s joint-venture, China International Fund Management (CIFM), was sold at auction, according to a filing on Friday at the Shanghai United Assets and Equity Exchange.

Although the buyer was not officially named, Reuters reported that JPMAM had been the sole bidder for the stake, citing two sources.

The auction closed at a price of RMB 241.3m ($34.78m), which is a 33% premium to JPMAM’s existing stake, according to Shanghai-based fund consultancy Z-Ben Advisors.

However, approvals from the US and Chinese authorities are needed before the change in ownership is confirmed, a person familiar with the process told FSA.

JPMAM declined to comment.

In late 2017, China’s securities regulator relaxed joint venture ownership limits for foreign asset managers, allowing them to apply for up to 51% ownership in a Chinese fund management firm.

In May, JPMAM’s joint-venture partner, Shanghai International Trust –  part of  Shanghai Pudong Development Group – said it would auction 2% of its holding in CIFM. A sale to the US asset manager would lift its holding to a controlling 51% stake from 49%.

Although JPMAM was unable to comment, earlier this month, a spokeswoman told FSA that “[JPMAM) has previously announced our intent and desire to increase our current joint venture stake in CIFM to a majority interest. We are pleased to be working closely with our joint venture partners as we continue to advance on our plans to expand our China onshore capabilities”.

The statement followed an announcement by China premier Li Keqiang that all foreign ownership limits on domestic financial firms would by lifted in 2020, a year earlier than planned.

Having a stake in a Chinese fund management firm allows foreign players to participate in the country’s $2trn retail market.

Invesco has moved towards majority control of its Shenzhen-based Invesco Great Wall Fund Management joint venture, and Morgan Stanley and HSBC are also rumoured to be preparing to assume control over their joint ventures.

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.

In addition, around 40 overseas asset managers have set up investment management wholly foreign-owned enterprises (WFOEs) which, depending on the type of licence they received, allows them to raise money from domestic investors to invest offshore (a qualified domestic limited partner licence), or sell a product invested in onshore assets to a maximum of 200 domestic qualified investors (private fund management licence).

However, in neither case are the WFOEs allowed to sell their products to mass market retail investors.

The Mutual Recognition of Funds, which allows foreign firms to gather investments from domestic investors, is a channel into China’s retail market. However, domestic investments cannot exceed 50% of the funds AUM – a limit JPMAM knows well because its popular northbound JPMorgan Asian Total Return Bond Fund had to put a subscription cap in place.

Mutual fund management joint ventures don’t have those restrictions, so JPMAM would have a first mover advantage among foreign firms in tapping a potentially vast source of assets.

Part of the Mark Allen Group.