China’s asset management industry is one of the last green fields of opportunity in China. In the last few years, China has made sweeping policy changes designed to open up the sector, and is set to do the same in other financial services, including banking and insurance.
One of the key aspects of the change in policy is that foreign asset managers are now able to operate a fully-foreign owned platform in China (in institutional and HNWI space), and, for the first time, will be able to hold majority stakes in joint ventures, which targets the retail customers.
These are game-changing opportunities that industry players can take advantage of with the right strategy.
At a special lunch at FundForum International 2018 in Berlin, Howhow Zhang, Director of Strategy at KPMG China, explained how.
China’s opening up
Four years ago China launched Stock Connect, a cross-boundary investment channel between Shanghai and Hong Kong, which allows mainland Chinese investors to buy stock on the Hong Kong stock exchange and vice versa. A similar programme between Hong Kong and Shenzhen was introduced in 2016. Last year, it launched Bond Connect, a similar programme which allows investors to buy bonds. Recently, the quota of shares that can be bought on Stock Connect was quadrupled.
At the beginning of 2018, China resumed its Qualified Domestic Limited Partnership (QDLP) scheme, which allows foreign alternative managers to raise money in China for investment overseas, after a two-year hiatus.
As a result of regulatory developments, the onshore asset management industry has seen phenomenal growth over last couple of years.
Two months later, the Qualified Domestic Institutional Investor (QDII) programme, which grants domestic retail and institutional investors quotas to buy overseas stocks and bonds, was also resumed.
Meanwhile, efforts are underway to create an ETF connect programme between Shanghai and Hong Kong, as well as a stock connect programme between Shanghai and London in the not too distant future.
What this all means for investors is closer links and a more globally efficient way of buying assets.
Running in parallel to these developments is changes to ownership rules. Foreign fund houses can now set up wholly foreign-owned enterprises and conduct onshore business.
A removal of limits on the business scope of joint ventures is also in the offing, which will give foreign asset managers the ability to control their joint ventures in China.
“We think that two or three years from now, we will see global asset managers and Chinese asset managers compete on a more even playing field in the Chinese market,” explained Zhang.
In addition, a series of regulatory developments have paved the way for the longer term growth of the asset management industry. Regulators have poured resources into creating a more rigorous and more holistic regulatory framework.
There have been systematic efforts to encourage and sometimes require Chinese managers to strengthen their internal risk controls. More recently, regulatory efforts have been concentrated on reining in the shadow banking system.
As a result of these regulatory developments, the onshore asset management industry has seen phenomenal growth over last couple of years.
For instance, the mutual fund markets has seen a 37% growth over last four years, and is now a USD2 trillion dollar market, making it one of the largest globally. There has been a similar trend on the private funds side.
Drivers of growth
There is reason to believe growth will continue, albeit at a slower rate.
A steady expansion of China’s capital markets, and the relaxation of investment restrictions, including the pension asset liberalisation across the three pillars, will contribute to the growth of the asset management industry.
If you look at most of the emerging markets, they have all done very well over the last few years, but they are either too mature or not big enough. China is one of the few that can make a difference, there are trillions of dollars of opportunity here.
In addition, business opportunities are being created by insurance companies. They can now buy more offshore and alternative assets, are increasingly using external managers to manage those investments.
Increasing foreign capital flows thanks to closer linkages with the rest of the world will promote the growth and efficiency of the local capital market as well as the fund industry.
“We expect the industry to grow at a double digit rate over the next 15 years,” stated Zhang.
But perhaps the largest opportunity for foreign managers comes from China’s pension reform.
The total pension assets in China across a three pillar system is expected to grow from the current USD1.5 trillion to USD7.5 trillion before 2025, registering a CAGR of 22%.
“China’s ageing society has forced its government to move from a government-sponsored defined benefit system to a more balanced system, and this is where most of the incremental growth comes from,” explained Zhang.
“There is a general consensus that people will have to save more money for their retirement. Also, in addition to saving more money, people need to realise a higher return on their pension accounts, which means a higher demand for more balanced portfolios. We see this as probably the biggest short- to mid-term opportunity for asset managers, as there will be increasing demand for professional asset management skills.
“It’s also one of the last few green fields that can move the needle globally for global asset management. If you look at most of the emerging markets, also Japan, Hong Kong and Singapore, they have all done very well over the last few years, with strong and stable growth, but they are either too mature or not big enough. China is one of the few that can make a difference, there are trillions of dollars of opportunity here.”
The importance of technology
Fifteen years ago you wouldn’t have imagined that we would one day be talking about China exporting technology to the rest of the world, but that is exactly what has happened.
In China, internet platforms account for the majority of the growth in the retail space over the last few years. These online platforms aggregate information and help investors keep track of investments.
A lot of Chinese asset managers have responded by creating their own digital channel, investing resources in mobile platforms and websites, and this pays off almost immediately. Those companies with a robust digital platform see 100-200% growth of sales within six months of launch of digital platform. This direct access to consumers allows for a more customized customer experience as well as for the design of more customer-centric products.
The average Chinese customer is more indifferent – if not more likely – to buy financial services from technology companies. Foreign asset managers and insurers need to be aware that they need to considerably adapt, rather than export, their existing business models.
Ultimately, foreign asset managers need to be having the conversation internally on whether they have the resources to compete in this market in a meaningful way
The disruption caused by technology creates a new partnership/rivalry dynamic. Where in the past the product manufacturer, the distributor and the buyer boundaries were clear and distinct, now they are looking at what ways they can work together.
In addition, technology companies, hitherto content with being the distributor are now applying for their own asset management licenses.
How to win?
“The most important question is how to win in this environment,” said Zhang. “We think there are four key success factors.”
The most successful asset managers are using technology to harness customer data and come up with personalised products and services, particularly in the retail industry.
Foreign asset managers struggle with legacy issues much more so than the Chinese. Legacy middle and back office operations slow processes down and limits their ability to compete.
Omni-channel engagement is critical, as customers expect to be able to access information and services on a wide range of devices, including, increasingly, wearable technology.
Companies like Alibaba and Tencent are streets ahead in terms of converting technology into value for consumers, and it’s difficult for new entrants to catch up in a short period. So how to live with the technology and how to acquire it becomes a key question for any foreign asset management strategy in China.
“Being more pragmatic and open minded to make technology enablement happen is going to be a winning element in the asset management industry in China,” states Zhang.
“Ultimately, foreign asset managers need to be having the conversation internally on whether, given these challenges, they have the resources to compete in this market in a meaningful way.”