The expected growth of China's pool of institutional assets should prove a magnet for foreign money managers newly able to set up investment management operations on the mainland, even if a number of firms appear content for now to let others lead the way.
The pool of assets Chinese institutional investors outsource to overseas managers should grow to $1.08 trillion by 2021 from $390 billion at the end of 2015, according to Shanghai-based financial markets consulting firm Z-Ben Advisors' latest forecasts, released Oct. 13.
Over the same period, however, the pool of assets that managers based on the mainland should be able to compete for is likely to surge by roughly $3 trillion to $5.1 trillion, Z-Ben estimates.
That “larger chunk” of assets up for grabs should provide “very compelling incentives” for foreign managers to take advantage of the new guidelines Chinese authorities outlined at the end of June allowing them — for the first time — to set up wholly-owned investment management operations on the mainland, said Nicholas T. Omondi, an analyst with Z-Ben, in an Oct. 14 interview.
While Hong Kong is where foreign managers now cite the bulk of their investment management capabilities for stocks and bonds traded in China, the center of gravity could begin shifting to the mainland within three years — the period after which managers with “private funds” licenses can obtain mutual fund licenses as well, predicted Mr. Omondi.
Z-Ben's forecasts show Chinese insurance companies accounting for the bulk of the increase in expected institutional allocations to external managers at home and abroad, with $4.4 trillion by the end of 2021 from $1.7 trillion as of 2015.
Domestic pension funds have the next biggest increase, in dollar terms, with China's National Council for Social Security Fund's allocations projected to jump to $1.1 trillion from $300 billion over the same period, while corporate pension funds, or enterprise annuities, should double to a combined $310 billion from $150 billion.
Combined allocations by two sovereign funds that have been a major focus of foreign managers over the past decade — China Investment Corp. and the State Administration of Foreign Exchange — will grow more slowly, to $410 billion from $330 billion, Z-Ben estimates.
In addition, Chinese banks and companies, in managing their balance sheets, are likewise adding to an investible pool that's already “very, very large and growing,” noted Yeh Cheng-Sen, a Shanghai-based partner with KPMG China's investment practice.
“There are a lot of mandates” coming to market, many of them in fixed income, and with the opening of China's asset management market to foreign asset managers in June, some foreign managers are newly “very serious” about setting up shop on the mainland, said Mr. Yeh.
Market participants say firms such as BlackRock Inc., UBS Asset Management, Fidelity International and Aberdeen Asset Management are likely to be in the first wave of firms establishing full-fledged money management operations on the mainland.
Executives at UBS and Aberdeen confirmed they're moving ahead now with plans to build operations in China, and expect to launch their first domestic funds for local institutional and high-net-worth investors next year.
A BlackRock spokesman said in an e-mail that the firm fully supports the policy developments China announced in June, adding that BlackRock executives “are working closely with the regulators to leverage the opportunities that this policy will provide.”
Fidelity executives weren't available to comment.
Executives with a number of firms, noting the steady drumbeat of regulatory changes in recent years, said they're looking to digest further details of the new policy as they're worked out in the future.
It remains a “very, very new channel,” with no firm having actually applied for a private funds management license yet, said David Chang, Franklin Templeton Investments' Hong Kong-based head of Greater China. Managers have to be both patient and nimble to navigate China's fast-developing regulatory environment, he added.
Asked about the June guidelines, Eleanor Seet, president of Nikko Asset Management in Singapore and head of Asia ex-Japan, said her team continues to monitor developments, anticipating that the “program will require time to mature and develop.”
Executives with a number of foreign firms suggested they have time to watch those developments.
With its focus now on pursuing inbound and outbound opportunities in China, BNP Paribas Investment Partners is committed to building onshore investment capabilities over the long term, to deliver what foreign clients are looking for when investing on the mainland, in areas such as the balance between risks and rewards, said Tan-Feng Cheng, BNP's Hong Kong-based head of Greater China business.
For those firms ready to jump in first, others will be able to “see how they do, and learn from their precedents,” said Mr. Cheng.
