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Special Report: DC in China

Growth in third pillar could spark partnerships again

Asset boom might cause overseas managers to seek domestic allies

Thomas Poullaouec said a partnership with a local Chinese manager would be the best way for T. Rowe Price to get into the target-date fund-of-funds market.

The growth prospects of China's fledgling third-pillar private retirement savings market could find global managers — just back from hanging out shingles on their wholly foreign-owned enterprises in Shanghai or Shenzhen — revisiting the joys of being partners with local managers in joint ventures or strategic alliances.

That shift in focus to partnership from independence reflects the fact that the newest pillar of China's retirement safety net is being built around mutual fund vehicles — the sector of China's asset management market where global managers continue to face significant, if receding, ownership hurdles.

While reforms look set to open China's mutual fund market to wholly owned foreign competitors as early as 2021, some global players are moving to dip their toes into the waters sooner.

In August, Fidelity International — which avoided joint venture minority partner status when that was the only means of serving local investors on the mainland — announced a strategic partnership with Beijing-based China Asset Management Co. to develop target-date fund products for the new third-pillar market.

Other global heavyweights are looking to follow suit.

"At this stage, the easiest and the quickest way for us to get access" to a target-date fund-of-funds opportunity in China central to T. Rowe Price Inc.'s core value proposition "is through a partnership with a local asset manager," said Thomas Poullaouec, the firm's Hong Kong-based head of multiasset solutions, Asia-Pacific.

"We've already had some talks with a couple of asset managers, and hopefully we'll be able to announce something during the course of the year," he said.

One Shanghai-based executive with a foreign manager, who declined to be named, said after years of fighting to plant their flags in China, the fact that it's still necessary for foreign firms to employ a buddy system to chase opportunities on the mainland is frustrating.

Foreign players in China seem to be forever on the outside with their noses at the window, hoping to come in and have a seat at the table, he said.

Still, compared to even a few years ago, China's money management market has a far greater number of moving parts, creating potential openings for foreign firms to compete more fully in coming years.

Mutual fund platform

Global managers who set up wholly foreign owned enterprises over the past three years and obtained the private fund management licenses needed to serve domestic qualified investors are looking to use that platform to launch mutual fund businesses, said Ivan Shi, research director with Z-Ben Advisors, a Shanghai-based consultancy on financial industry opportunities in China.

Existing rules permit managers to apply for the fund management company licenses they need to manage mutual funds three years after obtaining a private fund management license, a prospect that has left a number of global managers investing a lot of resources on the mainland, said Mr. Shi.

China's third-pillar pension target-date fund program, which could prove capable of dramatically boosting the mutual fund industry's growth prospects, is providing added incentives to do so, he said.

In April 2018, meanwhile, the China Securities Regulatory Commission lifted the ceiling for foreign ownership in joint venture fund management companies to 51% from 49%, prompting big global players such as Invesco (IVZ) Ltd. and J.P. Morgan Asset Management (JPM) to express an interest in taking majority stakes in their respective joint ventures.

Invesco may get there first.

In Invesco's SEC filing for the quarter ended June 30, 2018, the company said it had reached an "agreement in principle" to take a majority stake in its 49% joint venture, Invesco Great Wall Fund Management Co., and would begin consolidating the Shenzhen-based firm's assets under management.

An emailed statement from the Atlanta-based money manager said " Invesco is in active dialogue with relevant parties around increasing our ownership in Invesco Great Wall," and will provide updates if warranted.

An Invesco spokesman, asked if his firm's decision to consolidate Invesco Great Wall's AUM meant it had effectively taken control of the joint venture, declined to elaborate.

Overlapping reforms

Meanwhile the overlap between different waves of reform could complicate the timing for foreign managers looking to take control of mutual fund businesses on the mainland.

For example, global managers began winning private fund management licenses in 2017 — with Fidelity being the first to announce on Jan. 4 of that year — which would leave a number of firms crossing the three-year mark in the first half of 2020. But current regulations "won't allow for 100% foreign ownership until probably the middle of 2021," said Z-Ben Advisors' Mr. Shi.

And to do so in 2021, the institutional and high-net-worth businesses those global firms are building would have to meet other criteria, such as having minimum three-year average AUM of 2 billion yuan, noted Mr. Shi.

Applying for a fund management company license three years after getting a private fund management license is one track open to foreign managers, but there hasn't been a test case to show how an application from a foreign firm will be received, noted Jackson Lee, Fidelity's Shanghai-based head of China.

But the second track — from a recent U.S.-China trade agreement allowing even foreign firms without a PFM license to apply for a wholly owned fund management company license three years hence — could prove to be a "huge development," he said. "It's going to be extremely exciting by 2021."