Firms expected to rush in after China rule changes

Recent regulatory reforms have opened the door for global managers to set up wholly owned asset management operations in China after more than a decade where being a minority joint venture partner was their only way in.

The new rules, announced June 30 by the Asset Management Association of China, in conjunction with the country's securities regulator, allow wholly foreign-owned enterprises to register “private funds” with AMAC, and manage them on behalf of domestic institutional and high-net-worth investors.

Some market participants expect a who's who of high-profile managers to take advantage of that opening — particularly at a moment when China's regulators are restricting outflows by local investors, and foreign investors remain cautious about allocating more to local stocks and bonds.

The June announcement has left a number of top global money managers looking to set up operations in China, with several moving now to hire considerable numbers of staff, said Yeh Cheng-Sen, a Shanghai-based partner with KPMG China's investment practice.

Many leading global firms have already established WFOEs, a prerequisite for applying for a private fund manager license — among them BlackRock Inc., Fidelity International, UBS Asset Management, J.P. Morgan Asset Management, BNP Paribas Investment Partners and Aberdeen Asset Management PLC.

Executives with other heavyweight managers, including Pacific Investment Management Co., Vanguard Group and Allianz Global Investors GmbH, have said they are considering that option as they mull their China strategies.

At present, however, not all WFOEs are equal. The scope of a WFOE's business activities are spelled out at the time of its establishment, and only over the past 15 months have a handful — including Aberdeen, Fidelity and J.P. Morgan — succeeded in getting investment management included in their scope. Under the June guidelines, those firms are positioned to apply for private fund management licenses. In China, private funds are strategies for institutional and high-net-worth investors, opposed to retail-focused mutual funds.

Firms which established earlier “consulting” or “advisory” WFOEs would have to seek regulatory approval to expand their remit before seeking to manage private funds.

In an interview, Mr. Yeh likened the pickup in interest to establish investment management capabilities on the mainland to a “stampede.”

“Everybody is running fast, trying to get product up,” said Aries Tung, Hong Kong-based head of strategy and business development, China, with UBS Asset Management, in a separate interview.

The scale of a manager's ambitions when it comes to establishing investment capabilities on the mainland could depend on whether or not they have an existing joint venture with a Chinese partner, noted Hypatia E. Kingsley, Hong Kong-based leader of executive recruiter Spencer Stuart's Greater China business, and a member of the firm's global asset management practice.

Those that do have joint ventures face a “balancing act — how to support the JV, how to develop the WFOE,” agreed Mr. Yeh, adding that for many foreign partners, their Chinese joint ventures have proven to be “cash cows,” accounting for a large chunk of their Asia-Pacific revenues.

BNP Paribas Investment Partners' joint venture with Haitong Securities, HFT Investment Management, remains the centerpiece of the firm's broad China business, easily accounting for between two-thirds to three-fourths of “what we define as our Greater China book of business,” said Tan-Feng Cheng, BNP's Hong Kong-based head of Greater China business.

BNP Paribas is happy to entrust the “local-to-local” segment of its China business to its “profitable, successful” joint venture, while focusing on offering overseas products to Chinese investors and Chinese capabilities to overseas investors through China's qualified foreign institutional investor and renminbi QFII programs, said Mr. Cheng.

Meanwhile, under prevailing interpretations of the June 30 AMAC guidelines, all money raised for domestically-managed private funds must come from domestic institutional or high-net-worth investors, a less interesting proposition for BNP Paribas than it would be if the firm could tap qualified foreign institutional investors for those funds, said Mr. Cheng.

Likewise, Michael Falcon, J.P. Morgan Asset Management's Hong Kong-based CEO, global investment management Asia-Pacific, said his firm's 13-year-old joint venture in Shanghai with Shanghai International Trust & Investment Co. remains the core of its China business that taps a broad range of access points to pursue local and cross-border opportunities.

While JPMAM's WFOE may well have a private fund manager license within five years, for the moment it's “not a priority,” said Mr. Falcon. “Right now, we'd rather focus our institutional efforts (in China) on our regional and global (products), where we have a real advantage, and a lot of capabilities,” he said.

UBS' Mr. Tung, by contrast, said his firm's joint venture with China's State Development & Investment Corp. is focused strictly on the retail market, making UBS' goal of locally managing “institutional-style, private funds” complementary to that partnership.

“We don't really have a conflict with each other,” he said.

Frederick Laydon, Hong Kong-based chief operating officer with Principal Global Investors LLC, said his firm sees the relationship between its parent company, Principal Financial Group, and joint venture partner China Construction Bank as the foundation of Principal's broader business in China, and wouldn't be inclined to offer domestic products that compete with the joint venture.

“We appreciate the enormity of their distribution scope and their brand,” said Mr. Laydon, noting that Principal earlier this year signed a three-year agreement with CCB to extend their collaboration to other market segments in China, via CCB affiliates that have business interests in areas such as managing pension and insurance money.

If Principal pursues an asset management WFOE, it would be a qualified domestic limited partner WFOE, where the firm's expertise in areas such as real estate and hedge funds wouldn't be competing with CCB, rather than a private funds WFOE focused on managing stocks and bonds publicly traded on the mainland, he said.

Under the June 30 guidelines, meanwhile, a WFOE would have six months to bring a product to market after receiving its license to manage private funds and registering that product with AMAC — a challenging prospect for a firm setting up shop in the country, industry veterans say.

Building an investment team and platform — hiring talent and giving that team time to jell — takes time, said BNP Paribas' Mr. Cheng. Getting everything right in six months could be a little problematic, he added.

“When you can launch the first product” — and whether firms can field the full complement of local portfolio managers, analysts, risk management and operations professionals needed to do so successfully — will prove a key milestone, as well as a reputational risk, for foreign managers in China, said UBS' Mr. Tung.

That process could easily take more than six months — even a year, he said.

“It's a challenge but we're working on it,” said Mr. Tung. UBS is looking to convert its current consulting WFOE to an investment management WFOE by the end of this year, and has begun recruiting people and setting up its platform, he said. It will look to bring out products by the second half of 2017, he added.

In an e-mail, Ian Macdonald, deputy head of Asia-Pacific with Aberdeen, said the manager is looking to submit applications for both a private securities fund management license, to manage domestic funds onshore, and for a qualified domestic limited partnership quota, with a view to launching the firm's new China funds in 2017.

KPMG's Mr. Yeh predicted foreign managers making the investment in China now could be positioning themselves to compete for considerable mandates in the country's fast growing pool of assets, and with the newly broadened scope of WFOEs, “they will be the ones calling the shots in China.”