The main reason is the unwillingness of mainland partners to sell their stakes. “As the mainland partners do not lack money, they will be unlikely to sell the stake for financial reasons,” Hung said.
However, he added that mainland partners may be more inclined to give up control if the joint venture is already managed primarily by the foreign partner, or a majority of senior management is affiliated with the foreign entity.
Until recently, foreign asset managers doing business in China could own only up to 49% in a Chinese fund management firm. The country’s regulators have recently increased this limit to 51% and announced plans to remove the cap completely in three years, allowing 100% ownership of domestic asset managers by a foreign firm.
Currently, among the roughly 40 Sino-foreign joint ventures selling mutual funds to retail investors in China, only 17 have the foreign ownership reaching the 49% threshold, according to FSA research. (This number excludes joint ventures between mainland firms and those in Hong Kong or Taiwan, as many of them are Chinese-owned or insignificant in size.)
The only foreign-controlled JV in China, Hang Seng Qianhai, was established under the financial agreement between the mainland and Hong Kong.
Although Chinese authorities continue the process of opening doors for foreign managers to enter the country’s retail fund market, Hung said that it is realistic to expect only a small number of the existing joint ventures to become foreign-controlled in the next three years.
The fast changing regulatory landscape makes it difficult to predict how many joint ventures will eventually be wholly owned by a foreign manager, he added. Foreign firms will have to take into consideration the general market environment in China and abroad, and evaluate whether conditions are optimal for full ownership of a firm in what is still an emerging market.
First movers
Hung said that the first batch of foreign firms that will apply for a controlling stake in a JV are likely to be large-scale asset managers.
Morgan Stanley has already applied for approval to own a majority stake in its joint venture Morgan Stanley Huaxin Fund Management. JP Morgan Asset Management has also expressed interest in taking a majority stake in its JV, China International Fund Management, but has not yet submitted an application.
“Targeting the domestic retail market requires a lot of resources, such as local fund managers, and a good relationship with a domestic distributor,” Hung said. “Bigger firms have more resources to recruit the experienced local staff to support the domestic distribution.”
Smaller and less-known firms will be better off operating joint ventures, as they need to rely on the resources and expertise of domestic partners, he added.
Charles Lin, Vanguard’s Hong Kong-based country head for China, told FSA in an earlier interview that there is a strong home bias among investors in China’s retail fund market. When entering it, foreign fund managers need to find an effective way to compete against the investment capabilities, product offering and brand recognition of domestic managers, he noted.
Even if several foreign firms apply for the 51% JV ownership currently allowed, the overall product landscape on the mainland will not transform fundamentally in the short term, Lin noted.
However, the regulation allowing the majority foreign ownership of JVs potentially spells a gradual transformation in the culture of the industry. “Foreign participation brings in the culture of upholding good corporate governance practices,” Lin said. “The overall compliance and disclosure standards are poised to increase.”
