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Trade deal boost to asset managers’ China ambitions

The US-China phase one trade agreement provides opportunities for foreign asset managers in China's growing retail funds market, according to a Moody's report.

“The trade deal significantly liberalises the ability of foreign financial institutions to set up majority-owned or wholly owned subsidiaries of insurance companies and banks in China,” wrote Sean Hung, a Moody’s vice president and senior analyst.

The opportunities will be most pronounced for asset and fund management businesses, because this sector is less developed and more fragmented in China.

“The key beneficiaries will be US financial institutions that view China as strategically important, because of the large market for financial services for its rapidly growing middle class, while large Chinese institutions will in turn benefit from the expertise that the foreign companies bring,” wrote Hung.

Moreover, growing demand for wealth management products — particularly high-quality brands — and offshore assets will boost the prospects for well-regarded foreign asset management brands such as Vanguard, JP Morgan Asset Management and Blackrock.

Specifically, the phase one deal, signed on 15 January, eliminates a number of entry barriers for US financial institutions and contains commitments to remove the foreign equity cap, discriminatory regulatory processes, and overly burdensome licensing and operating requirements in insurance, securities and futures firms, as well as fund and wealth management sectors in China as soon as April 2020.

However, stringent know-your-customer and other compliance rules will likely inhibit the US financial institutions’ expansion into some more complex segments in China. The expansion will also require these financial institutions to have adequate risk management, according to Hung.

“The strong competitive position of Chinese firms will not diminish, given their market dominance, brand equity and distribution networks,” he wrote.

Domestic equity and bond markets

The deal will also improve global asset managers’ access to China’s domestic equity and bond markets and allow for a widening range of products they can offer to global investors. This could help address the imbalance between global investor’s investment securities exposure to China compared with China’s economic presence in the global economy.

Increased foreign ownership of Chinese securities will play an important role, and passive fund providers could act as a channel for domestic investors to reduce property and increase equity exposure, according to Moody’s.

Foreign vs domestic competition

While the trade deal will increase foreign participation in China’s financial industry, competition will not increase significantly for most domestic institutions, Huang warned.

“Incumbent Chinese firms still have strong franchises, client bases, sales networks and local distribution in traditional banking, insurance, securities and futures businesses. Foreign firms will need to find a niche to establish their market positions because of their lack of established distribution and brand recognition,” he wrote.

Nevertheless, foreign asset managers can benefit from a fragmented domestic market and the growing recognition of their brands, he added.

Over the past year, UBS Asset Management, Blackrock  and JP Morgan AM have all significantly increased their operations in China despite heightened US-China trade tensions.

Part of the Mark Allen Group.