China entry still a headache for foreign fund managers

The path to foreign control of domestic Chinese fund businesses isn't smooth, as those now applying for majority share licences are finding out. The US trade war isn't helping either.
China entry still a headache for foreign fund managers

Foreign fund managers waiting on licence applications for controlling stakes in domestic Chinese fund firms have seen the approval process suspended for an unspecified time, industry consultants  tell AsianInvestor

And the main reason for that is probably the US-China trade war, they say. But it is unlikely to be anything more than a blip.

“Yes, it is very likely that applications are now suspended due to ongoing geopolitical tensions, but the operative word is 'suspended'," said Peter Alexander, managing director of Shanghai-based China-entry consultant Z-Ben Advisors. “This happens from time to time when China looks to throw its weight around, but it is always a temporary dynamic and the same will hold this time around.”

In any case, there are bigger challenges ahead for would-be foreign asset managers in China.

Five global investment banks – UBS, Nomura, JP Morgan, Credit Suisse and Morgan Stanley – are officially working to obtain 51% domestic Chinese securities licences. Howhow Zhang, Hong Kong-based director of strategy at KPMG, told AsianInvestor it is his understanding that at least two of these managers currently awaiting approvals have had their applications put on hold.

For some Z-Ben clients the delay is considered potentially “very damaging” to their businesses, Alexander said. His advice to them, though, is don't get too upset it and press on with the China planning.

“What should not be done is using a temporary suspension of licensing as an excuse to pull back from, or stop altogether, their China entry and expansion strategies,” he said.

This latest about-turn by Chinese regulators is something foreign players need to get accustomed to, said Alexander. The expectation that China’s liberalisation process will follow a linear pattern is fanciful.


While the move to allow 51% ownership by foreign players was a significant development, Alexander said, “this was the easy part”. Getting a deal done would be much harder.

Those global asset managers who are coming to China with little or no direct business exposure onshore, may end up being disappointed, in Alexander’s view. He said the only Chinese targets these global managers would consider had to be large and profitable, having achieved real scalability.

The reality is that no such targets exist, or at least none that are willing to sell. Alexander said Z-Ben had canvassed all the major domestic managers “and there’s not a single one willing to sell a 51% stake to a global asset manager, no matter the price.”

On Wednesday, AsianInvestor reported on a perceived lack of commitment to China by UK fund managers. This was on the basis that China has complied with international demands for greater access and control for foreign players. And yet some are still sitting on their hands.

Sherry Madera, special adviser for Asia with the City of London Corporation, highlighted this relative lack of take-up by UK firms, while acknowledging that Brexit has perhaps distracted them.

She also understood that foreign asset managers need to be sure how they are going to make money in China. 

“If they’re looking to raise funds in China to invest globally, I can see how there would be a distinct advantage for an international manager to do that. But then comes another creeping problem; that there is zero outbound QDII quota available at the moment.” (QDII stands for qualified domestic institutional investor – a Chinese institutional investor able to invest in overseas securities).

From a Chinese perspective, if local regulators significantly open up the outbound quota of QDII or QDLP (Qualified Domestic Limited Partners), allowing more investment to flow outside China, this would only increase their trade concerns by potentially adding to any pressure on the renminbi at a time when their relationship with the US is deteriorating, Madera said.

Those concerns over time would become less of an issue as traditional QDII quotas and their QFII foreign-investor equivalent “are quickly giving way to new channels such as Stock Connect," Zhang said, citing the scheme connecting the Hong Kong, Shanghai and Shenzhen stock exchanges.

"In my opinion what is becoming increasingly more important is how UK firms position themselves under the broader cross-border framework – the recently introduced programmes as well as the ones are still in the pipeline such as London Connect and ETF Connect,” he said.

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