Chinese fund firms flag local, foreign plans

A significant number of Chinese asset managers are planning foreign expansion, but see this being held back by regulations, distribution hurdles and costs, found a new survey*.

They also expect mainland institutional investors’ foreign portfolio growth to be only moderate, according to the poll, released this week by the Asset Management Association of China (Amac).

Around a third (36%) of mutual fund houses and 21% of private fund managers are considering offshore expansion. 

Of these, 25% said the main challenge related to the differences in regulations and distribution networks elsewhere, with 24% citing expansion costs, and 23% blaming difficulties in recruiting talent.

Firms planning to expand overseas said their main motivation was domestic investors’ need for global allocation, and their desire to win business from overseas renminbi holders.

Hong Kong was the top destination for an offshore subsidiary, with the US, UK, Luxembourg and Singapore also cited.

Of those managers with international ambitions, 63% planned to hire 10 staff or fewer, 13% to recruit between 10 and 30, and only 2.2% intended to add more than 30 new employees.

Demand remains healthy for quotas under the qualified foreign institutional investor (QFII) and renminbi QFII schemes. Almost two-thirds (64%) of fund managers planned to apply for QFII/RQFII licences and quotas through their overseas units.

Meanwhile, eight of 24 private securities fund managers said that being sub-advisers for QFII quota holders was their main ambition for 2015, and 25% said they planned to invest overseas under the qualified domestic institutional investor (QDII) scheme.

Moreover, of 27 foreign holders of QFII licences, 48% and 30% planned to apply for additional RQFII and QFII quota, respectively.

Eight out of 27 foreign managers said they have started business under Shanghai's qualified domestic limited partnership (QDLP) scheme, and 17 foreign managers plan to enter this business. This allows firms to raise RMB funds and invest them offshore.

Those already within the QDLP programme said that creating attractive products was a key challenge, along with finding local partnerships and establishing local entities.

The first batch of six hedge fund managers won QDLP approval in September 2013, as reported. Shenzhen also recently granted the first licence under its qualified domestic investment enterprise (QDIE) programme. This allows domestic firms to sell overseas alternative products to wealthy onshore investors. 

Turning to Chinese policy development, both mainland and foreign managers have a wait-and-see attitude towards mutual recognition. Two-thirds (65%) of Chinese managers and 59% of foreign ones said they have not prepared for the scheme actively because they needed more details.

Among those managers preparing for mutual recognition, Chinese firms said selection of eligible fund products was the greatest uncertainty they faced (with 33% citing this), while foreign managers said the timeframe of implementation was their main challenge (44%).

Asked their expectations on reform over the next two years, 36% of Chinese managers said they hoped to see more liberalisation of pension insurance and enterprise annuities. Foreign firms hoped for more deregulation, relaxation of company-ownership rights, and further expansion of access to A-shares.

Overseas managers are only allowed to hold up to 49% of a joint-venture partnership in mutual fund firms, but these setups seem to been falling out of favour recently, with BNY Mellon and State Street Global Advisors selling their stakes in their mainland JVs last year.

The survey shows optimism about the A-share market, with 89% of Chinese managers expecting the Shanghai Composite Index to rise, 75% foreseeing a rise of more than 10% and 26% expecting a rise in excess of 20%. Of the QFII holders, 85% expect the Shanghai Composite Index to rise, and only 56% see it rising more than 10% in 2015.

*A total of 119 fund houses took part in the survey, including 49 Chinese mutual fund managers, 13 Hong Kong units of Chinese managers, three Hong Kong units of Chinese financial institutions, 27 private fund managers and 27 QFII holders. The survey was conducted in late October and early November.