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CCB: WFOEs have low chance of success in China

The path to success in China for a foreign fund management firm is the joint venture with a Chinese firm, argues Xianzhou Jiang, vice chairman and CEO of China Construction Bank (Asia), even though wholly foreign-owned enterprises (WFOEs) are now allowed to launch investment products on the mainland.

“If it’s only a foreign wholly-owned company, I believe it has a relatively low chance of success in China at this stage,” Jiang told FSA.

“The China market is very different from other developed markets in the US and Europe, hence an approach that is successful in the developed countries might not be applied to China,” he continued. A joint venture with a Chinese partner can bring out the best side of each firm, he added.

Jiang led the set-up of CCB Principal Asset Management, a mutual fund joint-venture with Iowa-based Principal Financial Group, in 2005. He remained chairman of the firm until 2014 when he relocated to Hong Kong to assume his role at CCB (Asia).

The first and most conspicuous challenge WFOEs face is distribution. “They have to rely on third parties,” Jiang said. “Although some fund houses might be very big globally outside China, the Chinese [investors] do not recognize them. The brand does not bring much value in the mainland.”

Second, their way of investment might not work in China. “Their investment philosophy, stock-picking ideas and ways of doing research might be very good, but they might not be applicable to China,” Jiang explained.

“The China A-share market has its special characteristics,” he said. In order to be successful in China, fund managers must take into account the market’s volatility, the interpretation and impact of government policies and sometimes even market rumours, he argued. 

In contrast, he believes a Chinese bank has various advantages. The main one is brand recognition among their individual and corporate customers.

Moreover, commercial banks have close relationships with, and a high level of understanding of listed companies, he noted. “It is very helpful to provide insight when the fund manager decides which listed stock to invest in.”

Cultural differences 

The challenge that may be the most difficult to overcome is the cultural difference, Jiang said. 

“Among the fund houses I have been in touch with for the setup of a JV asset management company, the majority of those big names are too confident,” he said. “They value their brands a lot.

“If they form a JV, they [think they] must lead the firm. Even though they cannot own the majority stake in the company due to regulation, they want to lead the operations,” he said. “That’s not what we want.”

Jiang said that in order to forestall such demands from a foreign partner and to retain a high level of influence, CCB adopted a rule when planning a joint venture: it would not pick one of the top 10 US fund companies. 

As of February 2017, there were 109 mutual fund houses in onshore China, 44 of them joint ventures with foreign firms, according to the Asset Management Association of China’s data.

Chinese regulations limit a foreign firm’s stake to 49%. Since last year however, WFOEs have been allowed to launch investment products to qualified investors, including institutional and high net worth clients. Fidelity is expected to become the first foreign fund manager to do so.

Jiang said the more WFOEs may be set up in China over the next three-to- five years, but he believes the development and market acceptance of the resulting products will be slow.

Part of Mark Allen.