Money managers gearing up for solo flights in China

Global asset management firms are poised to enter China's market on their own terms for the first time, after 17 years of an enforced buddy system with local majority partners.

That could leave wholly owned foreign managers with teams of portfolio managers and analysts on the mainland competing for onshore mandates from Chinese institutional investors of $1.2 trillion by 2020, up from $240 billion at the end of 2014, according to a recent estimate by Z-Ben Advisors, a Shanghai-based consulting firm.

On Sept. 22, U.K.-based Aberdeen Asset Management became the first foreign manager granted a license to set up a wholly foreign owned enterprise in China's Shanghai free-trade zone with “investment management” included in its scope of business.

Three weeks later, on Oct. 14, London-based Fidelity Worldwide Investment announced it, too, had established a WFOE in Shanghai to “facilitate future expansion plans,” which include offering “domestic investment capabilities to China-based institutional investors.”

A U.S. money management executive in Hong Kong, who declined to be named, said making it easier for foreign firms to do local business in China will focus attention on whether the “traditional asset management company joint venture” — which accounts for roughly half of the country's more than 100 fund management companies — remains a “valid business model.”

On Oct. 22, Hong Kong-based Value Partners Group — a 49% partner with Shenzhen-based Goldstate Securities Co. in joint venture fund management company Value Partners Goldstate Fund Management Co. — announced an agreement to sell its stake to an affiliate of Yunnan Jiutian Investment Enterprises Ltd. for renminbi 45 million ($7.1 million).

Value Partners bought its 49% stake three and a half years before for 40.5 million RMB.

Those recent developments at Aberdeen, Fidelity and Value Partners are the fruit of wide-ranging bilateral negotiations between China and the U.S. that included, according to a June 25 statement from the U.S. Treasury Department, China's commitment to allow “100% foreign-owned investment management firms to engage in private fund management” on behalf of local institutional and high-net-worth investors.

In a news release, Timothy Tse, Value Partners' CEO, said, “With China's pledge to allow foreign fund managers tapping its private fund market via WFOEs in the future, running a WFOE structure has become one of the top priorities which will facilitate the launch of our own-branded funds in China.”

Despite strong interest in China's market, and the establishment of representative offices and other operations, neither Aberdeen nor Fidelity had joined the list of 50 or so foreign firms going the joint venture route in China in the past decade or two.

“We like to control our destiny,” explained Alex Boggis, a Hong Kong-based managing director with Aberdeen, in an interview. Joint ventures “don't suit our corporate culture,” noted Mark Talbot, Fidelity's Hong Kong-based managing director, Asia-Pacific ex-Japan, in a separate interview.

Still, even though a number of regulatory details remain to be worked out and various approvals obtained, both executives said the newly expanded WFOE structure provides their firms with ample room to position themselves to take advantage of continued regulatory reforms in the country.

While China's regulators continue to work out the specifics on “what exactly can and can't be done within the context of a WFOE … we just think (the new structure) gives us incredible optionality to do a number of things in China,” Mr. Talbot said.

To some extent, that puts Fidelity and Aberdeen at odds with some foreign firms that apparently need greater clarity before they move ahead, said Peter Alexander, Z-Ben's managing partner, in an interview. Unfortunately, that level of certainty could be a long time coming, he said.

It's more a high-level statement of intent than rules saying just “what you can and cannot do,” but with Fidelity's long-term view on the market “we're comfortable with that level of ambiguity, Mr. Talbot said.

Some observers say all of China's regulatory ducks could be lined up within six months or so, but others say a long-term view could come in handy.

The expanded business scope for WFOEs should be “very significant” over the long term, but with other major players on China's regulatory landscape, including the China Securities Regulatory Commission, needing to sign off on changes, it could be a frustrating “one to two years before anything happens,” predicted Stuart H. Leckie, Hong Kong-based founder and principal of Stirling Finance Ltd., a research and consulting firm focused on the pension fund and asset management industry in Hong Kong and China.

Aberdeen's Mr. Boggis said even if that door to investing locally on behalf of China's institutional and high-net-worth investors takes a few years to open, that will be just one of several advantages the new WFOE scheme offers foreign managers.

For Aberdeen, a bigger priority will be applying for a qualified domestic limited partner license, for which an onshore presence is needed, Mr. Boggis said. A QDLP license will allow the firm to take private placements from local institutional investors and invest that money in the firm's offshore investment solutions business, which can include private equity or infrastructure investments with a multiasset framework, he said.

In its news release, Value Partners announced that the non-investment management WFOE it set up in June 2011 had obtained a QDLP license from the Shanghai Municipal Government Financial Services Office, with an initial $100 million quota to manage cross-border private funds.

Both Mr. Boggis and Mr. Talbot said their new WFOEs will allow Aberdeen and Fidelity to expand local teams of portfolio managers, analysts and client service professionals.

Mr. Talbot said eight of Fidelity's roughly 25 analysts covering Greater China are based in Shanghai at present.

While investing money locally for local institutional and high-net-worth investors is likely to be the first order of the new day for Fidelity when all the regulatory details are hammered out and approvals obtained, Mr. Talbot said eventually the goal will be to manage money in China more efficiently for Fidelity's offshore clients and help Chinese clients invest more efficiently overseas.

It's easy to continue thinking of China in segmented terms, with the country's qualified foreign institutional investor program and qualified domestic institutional investors program, but the long-term goal must be making China's financial centers like London, Hong Kong and Singapore: “successful … because people were able to manage money for clients anywhere in the world from those locations,” Mr. Talbot said.