Foreign control in China JVs: a game-changer for pay levels?
China’s move to allow foreign-majority control of local fund houses could be a game-changer for overseas firms in that it should give them more certainty in setting pay levels and more comfort to invest in technology and talent for mainland fund joint ventures, said Keith Pogson, senior partner of financial services at consultancy EY in Hong Kong.
He was commenting on planned rule changes announced on Friday (November 10), which will remove limits on foreign ownership of banks and raise caps on stakes in brokerages, fund houses and insurers, before ultimately removing those as well.
While there is unlikely to be a big rush by foreign firms to acquire stakes in mainland asset managers, he argued, overseas players with existing 49% stakes (the current upper limit) are likely to raise those to 51% (the planned new cap) when they can. And there are good reasons for doing so.
Talent retention
One major benefit of having a controlling stake will be foreign firms’ ability to pay staff in China as they see fit, said Hong Kong-based Pogson—which may not necesarily be the case as things stand.
“Having the freedom to set compensation for your staff can make a real difference,” he noted. “So moving from 49% to 51%, where you can actually have control over the comp of your staff, I think can be a game changer.
“One of the real challenges in the Chinese market is about compensation,” he explained. It can be difficult for foreign firms to hire international talent into mainland businesses to allow them to generate the kind of performance that attracts more client assets, noted Pogson. “That I think is a real issue.”
This situation may at least partly explain why the most successful investment managers in China often leave to set up their own shops.
“If you’ve got a genius in the market, then you have to remunerate these guys or they’re going to go to a place where they can get remunerated,” said Pogson. “In a JV with restrictions and controls, it’s not going to happen.”
However, if the foreign firm is in control, he noted, it can offer the compensation to attract not only the best onshore talent, but can also bring people in from overseas.
“If you’ve got some whizbang mainland trader who’s sitting on your Hong Kong trading floor, you can now put them in China and drive products,” said Pogson, “whereas before, you might not have been able or willing to share even their insights.”
A more robust solution?
Yet certainty over pay, talent and tech is not the only advantage of holding a controlling stake.
A majority-owned funds JV is potentially a better way of running an investment business in China than relying on a private fund management (PFM) licence, said Pogson.
Several firms—some of which also have JVs—have set up wholly foreign-owned enterprises and applied for PFMs for the new entities. A PFM currently permits firms to manage and offer products onshore to institutional and wealthy investors.
Of course, the ultimate aim for most foreign asset managers is to tap China’s mass-retail fund market.
The risk with a PFM licence is that the regulator could change its view on what is allowed under a PFM, said Pogson, “because, in reality, the way in which you’d want to use it is kind of an arbitrage. It gives you an opportunity, but if you start doing things that the regulator doesn’t like, they’re going to close down those loopholes pretty quickly.”
But with a majority-owned JV operating in the public mutual fund market, a firm is already effectively in the retail space. Hence, he said, it is “a more robust solution to the investment opportunity [than a PFM licence]”.
That said, cautioned Pogson, the rules remain unclear, so it would be unwise to make a final decision one way or the other or rule out a certain route. “I’d say watch this space as it evolves, and act upon it accordingly,” he noted.