Foreign managers see new opportunity from Chinese banks

Foreign money managers have begun positioning themselves to benefit as China's push to move trillions of dollars of opaque wealth management products from bank balance sheets to newly established asset management subsidiaries gathers momentum.

But potential gains could come at the cost of heightened complexity as foreign managers — many with minority stakes in fund management companies offering mutual funds to retail investors as well as wholly owned private fund management firms serving high-net-worth and institutional investors — consider establishing a third, separate asset management operation on the mainland to pursue that new opportunity.

Beijing's regulatory campaign, launched over the past year or so with the ultimate goal of improving the country's allocation of capital, effectively made late 2018 through 2019 "year zero for Chinese capital market reform," said Cliff Sheng, a Hong Kong-based partner with management consulting firm McKinsey & Co. And that's setting the stage for accelerated growth of China's asset management market in coming years, he said.

The move addresses apparent concerns of the regulator, China Banking and Insur- ance Regulatory Commission, with regard to the duration mismatch inherent in banks' wealth management products, while introducing more robust investment management practices, said Thomas Cheong, Hong Kong-based president of Principal Financial Group's business in Asia.

Assets in play come to more than 22 trillion yuan ($3.1 trillion), far bigger than the $2 trillion mutual fund market that has been the prime focus of foreign managers on the mainland, said Miao Hui, a Singapore-based senior analyst with Cerulli Associates Inc.

The first foreign manager tie-ups with local banks for the new segment were announced in December, in response to the Chinese government's invitation to foreign firms — as part of market-opening measures announced in July — to partner with the subsidiaries local banks set up at the behest of regulators over the past year or so.

Natasha Xie, a Shanghai-based partner with Chinese law firm JunHe LLP, said foreign managers will be looking to build new businesses with local bank asset management subsidiaries, as opposed to tapping into existing bank wealth management asset pools. The subsidiaries were set up to "ring-fence the banks from their off-balance-sheet liabilities," and their tie-ups with foreign firms will likely aim at building real asset management businesses "regulated by CBIRC, with a broader scope of business but possibly less regulation" than competitors operating under China's fund management company framework face at present, she said.

By separating wealth management businesses from the banks, regulators are aiming to push the message to investors that such products do carry risk, and are not backed by government guarantees.

On Dec. 3, J.P. Morgan Asset Management announced a strategic partnership with China Merchants Bank, making JPMAM a "preferred product provider" for CMB Wealth Management, the Shenzhen-based bank's recently launched asset management subsidiary.

Just over two weeks later, on Dec. 20, Paris-based Amundi announced it would become a majority shareholder of an asset management joint venture to be set up with Bank of China's new asset management subsidiary, BOC Wealth Management, by the second half of 2020 — with the aim of building "a first-class asset management company in China."

The July reforms allowed for a foreign firm to take a minority stake in a local bank's wealth management subsidiary but a majority stake in a subsidiary of that subsidiary.

Soon after Amundi's announcement, Bloomberg reported that BlackRock Inc. and Singapore government investment arm Temasek International Pte. Ltd. had reached a non-binding agreement with Beijing-based China Construction Bank Corp. to take a controlling stake in a subsidiary of CCB's new asset management subsidiary, CCB Wealth Management Co. Ltd. Spokesman for both BlackRock and Temasek declined to comment.

With regulators still hammering out key details of the new bank asset management subsidiary framework, some analysts predict foreign managers moving quickly to form tie-ups now may find themselves wishing they had hit the pause button.

There seems to be a lot of "ready, fire, aim" in play now, amid lingering uncertainties regarding what the business of these joint ventures is actually going to be, said Peter Alexander, managing director of Z-Ben Advisors, a Shanghai-based consulting firm focused on financial market opportunities on the mainland.

Another interesting point, Mr. Alexander said, is that the foreign and local firms in the tie-ups announced so far have long-established ties with other players. For example, Amundi "already has a (fund management company) joint venture with Agricultural Bank of China," he said. "Are they going to be competing? How does ABC feel about that?"

Despite those uncertainties, Mr. Alexander predicts another half-dozen to 10 partnerships could be announced over the next six to eight months, reflecting in part the pressure big foreign managers are under to build profitable businesses on the mainland.

New opportunities to manage assets for local banks, meanwhile, will effectively add a third major market segment for foreign money managers to pursue on the mainland on top of the fund management company sector and the wholly foreign-owned private fund manager sector.

The latest opportunity is emerging just as China is set, starting in April, to allow foreign firms to become 100% owners of local fund management companies, removing restrictions that had limited them, first, to minority 49% stakes and over the past year to 51%.

The addition of an asset management joint venture overseeing money for bank clients could leave foreign managers with three firms on the mainland, overseen by two different regulators, with different teams, different compliance operations, different boards, all bearing similar brands — a situation that could cause confusion for investors, noted Jackson Lee, Shanghai-based country head, China, with Fidelity International.

While opportunities to manage those bank assets — and even 10% of a $3 trillion pool would be a massive number — will be "very, very interesting," managers with fund management companies and wholly owned private fund management firms will have to ask themselves if they have "the management bandwidth to manage all three of them well," Mr. Lee said. "How do you manage the different dynamics and potential conflicts between the different entities?"

The Shanghai-based head of China for one large global manager, who declined to be named, suggested he's willing to take his chances, noting that the new opportunities emerging now to work with bank asset management subsidiaries look set to offer both scale and healthy margins.

Money managers and analysts say winning external mandates from bank asset management companies is another option for tapping those new opportunities to manage the assets of bank clients.

Opportunities to get institutional mandates from bank wealth management subsidiaries will be open to all managers — fund management companies, private fund management firms and the asset management arms of securities companies and insurance companies, whether they are domestic, joint venture or wholly foreign owned, McKinsey's Mr. Sheng said.

And those opportunities could be especially rich early on, before the new bank asset management companies have time to establish broad-based capabilities, market veterans say.

Banks have a natural edge in managing fixed income, but in areas such as equities they're unlikely to be as strong now as external managers, noted Ying Tan, president and general manager of Russell Investment Management (Shanghai) Co. Ltd.

"At the very beginning, when those wealth management subsidiaries are still in the process of enhancing their in-house resources and capabilities, outsourcing to external managers will be a good option, particularly given their urgent mission" — under pressure from regulators — "to move into net asset value products" offering greater transparency, she said.

"Those asset managers, including foreign managers, who can demonstrate their competitive edge and manage products that meet banking clients' risk-and-return profile will be the big winners," Ms. Tan said.

Executives with private fund management companies — restricted to serving qualified investors — predict their firms could benefit, too.

While capital tie-ups make more sense for huge managers such as Amundi and banking giants like Bank of China, there will be room for private fund management boutiques to win significant mandates as the businesses of those bank asset management arms take off "sometime this year," predicted Rencan Tian, CEO of UBP Investment Management (Shanghai) Ltd.

Those newly launched bank subsidiaries are setting up their processes, defining their business plans and figuring out how they can "provide products to the banks to replace the traditional wealth management products" they offered, Mr. Tian said.

Mr. Tian predicted mandates from bank asset management units could become a material part of his firm's business, which stood at roughly 10 billion yuan in low-volatility and convertible bond strategies at the end of 2019, if it can work with them to craft products that meet their needs.

McKinsey's Mr. Sheng said establishing a tie-up with a bank asset management subsidiary could prove especially attractive for big foreign firms that haven't planted their flags on the mainland yet. The license for bank wealth management subsidiaries, which allows investments in private as well as public markets, provide the most flexibility of any asset management license available now, he said. At the same time, a tie-up would allow a newcomer to tap into a bank's considerable distribution power, he said.