Credit Agricole, Axa prep China funds JVs

Credit Agricole Asset Management and Axa Investment Management are negotiating fund management joint ventures with Agricultural Bank of China and Shanghai Pudong Development Bank, respectively. Minsheng Bank is said to be in similar discussions with three suitors, including investment banks.

These deals, if they are inked and approved by China's regulators, will represent a second wave of new fund management companies controlled by China's commercial banks.

Until recently, banks were not allowed to own stakes in a fund management company. Rather they have been the primary distribution channel for third-party funds, thanks to their national or regional branch networks. The Chinese Securities Regulatory Commission long opposed the entry of banks into the funds management world, which the CSRC regulates, as it does not have control over banks, which are regulated by the Chinese Banking Regulatory Commission (CBRC).

The State Council, however, has been keen to build up multiple institutional sources of demand for equities, in a bid to reverse the four-year decline in the A-share market, a view that the CSRC has come to accept, with the proviso that banks must find foreign partners. And the senior managers at China's leading banks have lobbied hard to extend their empires. This culminated in the launch earlier this month of the first product by a bank-owned fund company, ICBC Fund Management, a JV with Credit Suisse Asset Management. It was an equity fund, and is said to be on track to raise Rmb5 billion ($618 million).

This will be followed this year by two more equity fund launches from hastily arranged bank-owned JVs, Bank of Communications (with Schroder Investment Management) and Chinese Construction Bank (with Principal Global Investors).

Other banks are reportedly keen to join the game, including Agricultural Bank and Bank of China (which, along with ICBC and Construction Bank, comprise the big four national state-owned banks), and smaller, privately owned banks including China Merchants Bank, Everbright Bank, Minsheng and Shanghai Pudong Development Bank (aka Pu Fa).

But timetables remain speculative.

Minsheng and Pu Fa are sought after as partners for their nimble and aggressive management, but industry sources say they may face capital issues. These banks have moved so aggressively that they have maxed out their capital adequacy ratios, both hitting the 8% reserve requirements stipulated by the Bank of International Settlements, and the CBRC and People's Bank of China may be reluctant to approve new business ventures if it threatens this. So a deal may be contingent upon means of bolstering tier-1 capital. (Officials at Axa, questioned about widespread rumours in China about a deal with Pu Fa, declined to comment.)

Agricultural Bank would be prized for its national distribution network, comparable to that of ICBC and Construction Bank. Funds industry executives note that Agricultural Bank has not been as aggressive as ICBC in pushing funds through its pipelines - launching about 10 funds last year, versus about 20 for ICBC and CCB each - and therefore has not exhausted its client base. It has also not yet inured its front-line staff to incentives (or bribes) to sell funds. "Agricultural Bank has been very selective about the funds it sells," notes a Shanghai-based executive.

On the other hand, the bank also suffers from levels of non-performing loans horrendous even by Chinese standards. The CBRC is under pressure to get these NPLs under control and market players speculate it may hesitate to grant Agricultural Bank new business ventures until more progress is seen on the balance sheet.

For these reasons, market players initially believed the second round of bank-owned JVs would not see daylight for a good year after the first batch emerged. But now the thinking is these may be approved rapidly, with their first products hitting the market in the first quarter of 2006, because the government is so keen to pump demand for equities. (All the first three bank-owned fund company launches are equity funds - at the central government's insistence, say market players.)

The other candidates - China Merchants, Everbright and Bank of China - may in fact get there first, because their securities arms already are shareholders in fund JVs with foreigners. China Merchants Fund Management, in league with ING Investment Management, is widely considered a success story, while Everbright Prumerica Fund Management is struggling. CMFM is likely to be straightforward: China Merchants Bank has no other competing JVs and can easily take a direct stake in the JV.

Everbright has an insurance JV with Sun Life of Canada, which could prove a competitor to the funds JV with America's Prudential, particularly if the target is corporate pensions. So it is not clear whether Everbright Bank will lump for a stake in the funds JV, or do something with Sun Life, although rivals predict the first scenario will occur.

BoC is considered the wild card. Bank of China execs reportedly do not always see eye to eye with Bank of China International. BoCI has a funds JV in China with Merrill Lynch. This rivalry has fed speculation that BoC may well decide to tread a new path and set up a JV under its direct control with a new partner. BoCI-Merrill Lynch executives are said to be under pressure to prove themselves worthy to Bank of China. This is all gossip, however, which should be balanced against the fact that Merrill Lynch has just agreed to take a 2.8% stake in Bank of China itself, in part of the BoC deal with Royal Bank of Scotland.

So far, the first three bank JVs have all involved a third party from the industrial world, usually there to give the impression that the banking parent isn't able to commandeer the JV. Credit Agricole and Agricultural Bank are reportedly setting up their JV with Aluminum Company of China (Chalco). Credit Agricole has apparently been wooing Agricultural Bank for some time, a strategy in line with the French group's similar courtship in Korea of the National Agricultural Cooperative Federation, with which it now has a fund management JV. Credit Agricole Asset Management officials declined to comment. Details about Axa and Pu Fa's third partner have not yet been revealed.

For a detailed look at the impact of the bank-owned fund companies in China's asset management industry, see the upcoming August/September edition of AsianInvestor magazine, due out early next month.