U.S. money managers behind European brethren in China

U.S. money management firms are underrepresented in the push to grab a piece of China's asset management market.

That market gradually is getting more crowded — more with European firms than American ones — now that the Chinese investment management industry has taken steps toward maturation.

"It's a complicated market that is developing very quickly," said Chiang Hsien, chief executive officer of Guotai Junan Allianz Fund Management Co. Ltd., Shanghai, the first joint venture fund management company formed in China back in 2002. "And if you're not here now, it could be very difficult to directly take part in the future growth."

A joint venture is the only way for a foreign money manager to establish operations in China and manage Chinese assets. At press time, there were 23 joint-venture fund management companies, three-quarters of which were with European financial institutions, according to the China Securities Regulatory Commission, Beijing.

Six U.S.-based companies have access to China through joint ventures. They are: Lord, Abbett & Co.; JPMorgan Asset Management; AIG Global Investment Group; Principal Financial Group; Prudential Investment Management Inc.; and BlackRock Inc.

BlackRock gained its access when it acquired Merrill Lynch Investment Managers, which had a joint venture partnership with the Bank of China.

Some U.S. money management giants, such as Fidelity Investments, Legg Mason Inc., State Street Global Advisors and Mellon Financial Corp., are notably absent from the joint venture marketplace, even though officials at each have said Asia is a strategic marketplace for future growth.

Some insiders say U.S. firms might be on the sidelines because foreign partners may own no more than 49% of a joint venture company.

"A lot of companies may choose to wait until they can take a greater stake, or until they can have a wholly owned business here," said Desmond Chan, chief executive officer of AIG-Huatai Fund Management Co. Ltd., Shanghai.

Executives of some U.S. firms could be concerned they wouldn't have enough control over the joint venture, he said. That's not an issue for officials of the U.S. partner in AIG-Huatai, because each partner owns 49%.

"It's a partnership," said Steve Guterman, senior managing director and head of business development at AIG Global in New York. "When we got into this almost two years ago, we didn't want to wait until the regulations changed — we decided that the time is now."

Mr. Guterman said AIG Global initially bought a 33% stake in the joint venture in 2004, the maximum at the time. But regulators made it clear then that the limit would soon be raised to 49% and the firm increased its stake in September 2005.

Andrew Lo, Hong Kong-based chief executive officer of Asia-Pacific for INVESCO Asia Ltd., said regulators have given no indication if, or when, they will raise the 49% ceiling. "Now, this path is very unclear," said Mr. Lo.

INVESCO owns 49% of INVESCO Great Wall Fund Management Co. Ltd., Shenzhen. Great Wall Securities Co. Ltd., Dalian Shide Group Co. Ltd. and Kailuan Group Co. Ltd. own the rest.

Without any indication the rules will change, there is little reason to wait to enter the Chinese fund management market, some players say.

"It's a highly effective way to get involved because you have a partner, on the ground, who can work with you to build a new operation right away," said Zane Brown, partner at Lord Abbett, Jersey City, N.J., which in May formed a joint venture with Changjiang Securities Co. Ltd., Wuhan, and Tsinghua Holdings Co. Ltd., Beijing. "And not only does it give you a better understanding for how regulators operate, it also allows you to learn more about distribution as well."

Distribution is a major challenge in the market, said Shek Chee Seng, CEO of CITIC Prudential Fund Management Co. Ltd., Shanghai. China's "Big Four" banks — China Construction Bank, Bank of China, Industrial & Commercial Bank of China and Agricultural Bank of China — control how the vast majority of funds are sold.

Having a joint venture has enabled a number of foreign fund managers to establish themselves with these banks, as well as with smaller distributors, he said. That is a critical component in a market that is "very relationship-driven."

CITIC Prudential is a joint venture run by U.K.-based financial services company Prudential PLC and the China International Trust and Investment Corp. Prudential holds a 49% stake in the venture, while CITIC owns the remaining 51%.

One problem for U.S. firms that only now are considering joint ventures in China: fewer potential partners. Between June 2005 and October 2006, seven new joint ventures were formed.

There are other ways for money management firms to participate in China's market.

The qualified foreign institutional investor and qualified domestic institutional investor programs both allow foreign managers and investors to invest in Chinese markets. The foreign program allows licensed foreigners to invest limited amounts of money in China's A-share market; the domestic program permits licensed Chinese institutions to invest money outside of China.

INVESCO's Mr. Lo said in order to have a "true Chinese strategy," a firm must be involved in the QFII and QDII programs, as well as a joint venture. "Being involved with all three gives you local, cross-border and offshore capabilities, said Mr. Lo. "A complete strategy for a foreign firm should not rely on just one of these approaches."

John Larum, president of China business at UBS Global Asset Management in Hong Kong, said the Chinese investment management industry still has room for new players, no matter where they are based. "No particular foreign group has any monopoly in working and understanding the Chinese market," Mr. Larum said.

UBS has a joint venture with China's State Development and Investment Corp., UBS SDIC Fund Management Co. Ltd., in which UBS owns a 49% stake while SDIC holds the balance.

"The background of the foreign company is not the key success factor. ... It is the ability to transfer the most appropriate international know-how to China, and make that work within the China market and regulatory environment."