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The plus and minus of China’s new foreign ownership rules

China recently announced it would ease foreign ownership limits for fund management firms, but huge challenges await foreign players that want to enter China's retail investor market, industry sources said.
Charles Lin, Vanguard

Foreign managers participating in the domestic retail fund management industry are required to have a joint venture with a local partner, with ownership limits set to 49%.

However, China announced on Friday that the ownership cap will be raised to 51% from 49%, and then limits will be completely removed in three years. Regulators are still drafting the rules.

“This regulatory change will provide huge opportunities for global players who want to enter the country. But it will also be challenging for global asset managers who want to be successful in China,” Charles Lin, Vanguard’s Hong Kong-based country head of China, told FSA.

Selling funds in China

Difficulties include distribution and competition.

China’s distribution channels for traditional equity and fixed income funds are dominated by mainland banks, which are commission-driven, according to Lin.

“[The commissions] will create a conflict of interest between investors and the distribution channel,” he said, noting that Vanguard does not pay distribution fees. If Vanguard were to enter China’s retail market, the requirement of paying commission to banks would represent a “huge challenge”, he added.

In addition, only a few large banks dominate in China, added Matthew Phillips, PwC’s Hong Kong-based financial services leader for China and Hong Kong.

Matthew Phillips, PwC

“Foreign players that have already partnered with the leading banks and insurers have found a significant degree of success and have built very sizable businesses that are profitable,” he said. “But there are relatively few opportunities to do that because there are only a few large banks.”

However, Phillips believes other distribution channels such as direct selling or through fintech companies are viable.

Vanguard’s Lin is less optimistic, saying that most of the fund products available on online financial platforms, such as Lufax and Tencent, are money-market funds.

Home bias

Besides distribution, foreign fund managers will have to deal with competition.

“There is a strong home bias in the China market,” Lin said. Foreign fund managers need to find an effective way to compete against the investment capabilities, product offering and brand recognition of domestic managers.

“Local asset managers will also continue to grow in the next three-to-five years and they will also start to have a regional or even global brand,” he added.

Stewart Aldcroft, Cititrust’s Hong Kong-based chairman and managing director, added that foreign asset managers will spend a substantial amount of time and money to be recognised locally.

Stewart Aldcroft, Cititrust

He believes 100% ownership of a domestic asset management firm is a huge opportunity for asset managers who prefer to “only do things in their own name” and do not want a joint venture.

“But they should be big enough and have the resources with which to build their own presence. Those that want to compete will need to build up a brand name. They need to spend a lot of money over the next few years to give themselves the opportunity to be known to by the public.”

Part of the Mark Allen Group.