China fund houses set to go global: JP Morgan’s Falcon
Expanding within China’s fund management space is JP Morgan Asset Management’s key priority, but eventually rivals from the country will compete with it across the world, believes the US fund house’s Asia chief executive.
“I think over the course of the next 10 to 20 years, we’ll be talking about many Chinese players as competitors, not just in China or the region, but around the world,” said Michael Falcon.
Speaking to AsianInvestor following JP Morgan Asset Management being named Asset Manager of the Year in our latest Asset Management Awards, Falcon offered views on where the fund house stands today in the region, and where he saw key areas of development.
Chinese fund houses today are only truly competitive in their home market, although this is the world’s second-largest economy. But as the country keeps liberalising its financial markets, Falcon believes they will eventually gain the products and services they need to mount a genuine competitive threat in other parts of the world.
“Do they have the same types of capabilities ex-China and into the region and globally? Not yet, but they’re building those aggressively,” Falcon said.
He said local players could build up those capabilities through more organic expansion, or choose to go through an M&A approach or a venture partnership, he added.
Falcon’s opinion stands in line with the long-term predictions of other industry observers. In January, consultancy EY released a report that noted that recent regulatory reforms, including restrictions on channel business, regulating capital pool, and leverage reduction, may slow the growth of Chinese asset managers in the short term. However, the long-term effect would be beneficial to the maturation and standardisation of the industry.
The push to eliminate shadow banking and other practices that represent systemic risks will deepen domestic financial markets and expand financial instruments, allowing local asset managers to deploy more strategies than before, according to a March report by management consultancy Oliver Wyman. These new capabilities should help them to close the gap with global fund houses, especially when looking at overseas markets.
TRADE WAR PROSPECTS
China’s financial regulatory reforms are taking place against the backdrop of increasing trade tensions with the US. The two largest economies in the world by nominal GDP have engaged in a tit-for-tat implementation of tariffs since March 2018, the most recent move a 10% tariff on $200 billion of Chinese imports announced on July 10.
Despite the escalating trade frictions, Falcon isn’t convinced it’s time to panic. “I wouldn’t say we’re in a global trade war yet, or that China’s in a global trade war,” he said.
The trade tensions are one aspect of a very complicated and integrated US-Chinese relationship, and the impact of the tariffs so far is quite limited, and it should have little to no impact on China’s overarching appeal to asset managers, he added.
“I don’t think it changes the long-term outlook for opportunities for our firm or other firms within China, and I don’t think it changes the underlying motivations within China for these reforms.”
His optimism is founded on Beijing’s multi-year commitment to keep liberalising. The direction of change in China for market reforms is well established and consistent, and it has numerous reasons to keep pushing for more reforms.
“China’s not doing these reforms for the benefit of the US or Europe or the global economy. They’re doing them because it makes sense for China to do it,” said Falcon.
The country has long-term needs to develop its capital markets and restructure state-owned enterprises, which are very important to social and economic stability and progression, he added. Ensuring social stability is of paramount priority to a totalitarian government that is fearful of mass-protests.
Attracting capital is also a key priority. Most recently, the China Securities Regulatory Commission reportedly said it would let overseas retail investors trade in A-shares through local brokers, shortly after index provider MSCI included a small weighting of A-shares into its Emerging Markets Index.
CHINA FOR CHINA
While geopolitical disputes could cause some disruption in carrying out reforms in the very short term due to external factors, the JP Morgan AM chief executive doesn’t anticipate fundamental changes or backtracking in the overall direction of the reforms.
That includes Beijing’s outstanding changes to let overseas investors become majority owners in local asset management companies and joint ventures, announced in November 2017. While the change isn’t likely to spark an inrush of new players, it gives overseas players like JP Morgan AM the confidence to invest more into their local China businesses.
Falcon is eager to do so, given the rapid expansion of the country’s fund industry. Asset management assets in China have grown by a factor of nearly 24 in the last 10 years, from $800 billion in 2008 to $18.8 trillion in 2017, according to the Oliver Wyman report. It’s expected to expand further to hit about $30 trillion by 2022.
This offers a relatively rare opportunity for foreign fund managers, which have been struggling to combat narrowing margins and a shift of assets into cheaper passive funds across the world. JP Morgan Asset Management's global revenue dropped 5% to $6 billion during 2017, in part due to lower performance fees.
While Falcon believes global asset management will remain fairly fragmented, he believes many will seek to grow in China. But successful foreign houses will need a sizeable local presence, as the key opportunity will lie in selling local investment products to local investors, he added.
These local investors are growing more familiar with the different financial instruments available, and they will increasingly want more balanced and diversified products as they shift their investment goals, he predicted.
“As you see a maturation of investment markets and democratisation of access to investments, you’ll see a more outcome-oriented approach to portfolios, as opposed to an opportunistic and trading approach.”
Despite his optimism, Falcon said that challenges exist. He pointed to the fact that China has less developed financial instruments, capital controls, and relative isolation from global markets. However, he believes even these limitations could offer opportunity, as the market matures.
“That’s going to be both the biggest opportunity as well as the challenge, just given how new, emerging, volatile, and complex that market is.”
For more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 2122 5262.
This article has been updated to clarify Falcon's job title