JP Morgan AM’s new China WFOE seen as test case
After getting the green light to set up a wholly foreign-owned enterprise (WFOE) in Shanghai’s free trade zone (FTZ) late last month, JP Morgan Asset Management looks set to act as a test case. It is the first foreign firm with a Chinese fund management joint venture to also establish a mainland investment management WFOE.
The US fund house’s move may alleviate concerns that an investment management WFOE (IM WFOE) could be disruptive for a mainland joint venture in that the two could compete for business, says Shanghai-based consultancy Z-Ben Advisors.
Firms such as Axa Investment Managers are likely to be watching this development closely. The French house has said it plans to set up a WFOE – but, notably, not an IM WFOE – alongside its local JV, Axa-SPDB Investment Managers.
JP Morgan Asset Management (Shanghai) received approval from the FTZ’s administration on August 24 to conduct asset management, investment management and investment advisory business in China. Desiree Wang, head of China, will be the legal representative of the new WFOE.
The firm says it is the first foreign fund house to set up an asset management WFOE, but it is not clear how the licence materially differs from the IM WFOE approval granted to three other firms in the past year (Aberdeen, Bridgewater and Fidelity). "Asset management" is included in the WFOE's business scope, meaning the new entity can use the term in its name.
Buildout plans
JP Morgan has built a nine-strong team focused on the Chinese retail and intermediary segment and a six-strong team focus on mainland institutions, both based in Hong Kong. It also plans to hire staff for legal, compliance, finance and control functions, and relocate Chinese executives internally to the onshore WFOE.
Michael Falcon, Asia-Pacific chief executive at JP Morgan AM, told AsianInvestor: “Increasingly a local presence will help us get closer to clients and distribution partners; it will be different from primarily flying people in from Hong Kong and the region as we do now.
“More importantly, it will allow us to gain experience and capability to operate in this fast-growing market," he added.
Falcon stressed the firm would continue to invest in its mainland fund JV – China International Fund Management (CIFM) – which was set up in 2004.
One of the WFOE’s functions is to expand the firm’s China business, including providing onshore support to CIFM and to business partners and clients. “We want to increase our onshore presence across all parts of our China business in the coming 12-18 months,” said Falcon.
Three other foreign fund houses – Aberdeen, Fidelity and Bridgewater – have set up similar entities in China in the past year, but their WFOEs do not have “asset management” in the business scope, though their function will be the same.
They can all operate as onshore private fund houses and to manage money for institutions and wealthy clients once they have registered with the Asset Management Association of China.
Potential rivalry
Unlike JPM AM, the other three managers do not have fund JVs, hence Z-Ben Advisors sees its move as particularly significant. Such a landmark move will require more consideration and communication between the two units, as they could directly compete for institutional and wealthy clients, said Sun.
Moreover, it is possible for an IM WFOE to obtain a local mutual fund company licence after it operates as a private firm for three years, meaning yet another potential area of competition for the JV.
JPM AM – named by Z-Ben as the top foreign fund house in China in respect of the strength of its onshore business – has built its mainland business lines through several avenues, including offering foreign funds via qualified domestic institutional investor (QDII) platforms.
It has also teamed up with CIFM to launch northbound and southbound products under the mutual recognition of funds scheme and to participate in Shanghai’s qualified domestic limited partnership programme.