The third decade of the 21st century has had a bumpy start. With a global pandemic, the fraying US-China relationship, Brexit, market turmoil, a looming recession and various other uncertainties, the world is in a state of flux. However, the world’s second-largest asset management market is increasingly open to foreign players, explain Yang Yuhua and Lv Hong of LLinks Law Offices. And that has to be a good thing.
In China, the second-largest asset management market in the world, the non-channel assets under management (AuM) – excluding banking-asset-management products and trust companies – is estimated to have expanded by 10% in 2019, and is now worth US$7.3 trillion. China’s asset management industry has also been tilting toward retail investors (which account for 60% of the country’s total AuM) and posted strong growth of 14% during 2019.
Looking forward, the total asset management market, including the fund houses, banking-asset-management sector, insurers and trust companies, is projected to surpass the £17 trillion mark by 2021. This will provide international players with their single biggest growth opportunity over the next decade.
In addition, rapid changes are taking place as a result of regulatory amendments, increased openness toward foreign players, and increasing wealth and innovation.
A tectonic shift is taking place in global asset management as the world’s largest fund managers seek to muscle in on China’s long-shielded financial markets. Between 1998 and 2016, the Chinese regulator granted 44 Sino-foreign joint-venture (JV) retail fund manager licenses, and foreign shareholding was limited to minority equity status only. Between 2017 and 2019, Chinese authorities finally started to lift the restrictions on foreign investment in protected but lucrative financial sectors, particularly asset management. So far, 26 leading international asset managers have obtained private fund manager licenses (PFM) in China with more than 100 private funds launched.
A tectonic shift is taking place as the world’s largest fund managers seek to muscle in on China’s long-shielded financial markets.
Late last year the green light was given to international players to enter China’s retail fund market. On 1 April 2020, the Chinese regulator started to accept license applications for wholly foreign-owned retail fund managers, marking a significant milestone for the industry. Up to now, BlackRock, Neuberger Berman and Fidelity have submitted their respective license applications – all companies advised by Llinks. Competition among global rivals for a share of the mainland market is intensifying.
Although the door is opening for multinational companies to compete on a level playing field with domestic incumbents, there are undoubtedly challenges. The top five challenges facing asset management firms entering the Chinese market are:
Reconciling national and regional requirements
Global asset managers will need to understand China’s complex legal and regulatory requirements, as well as local industry best practices.
Localising a global advantage
Companies will need to ensure Chinese subsidiaries satisfy the local regulatory requirements in respect to their independent operation, while leveraging and maximising global resources.
A clear market proposition needs to be set out to differentiate the business allow it to compete successfully with local players.
There is already an issue of fee compression and gradually mounting cost pressures – pricing strategy is crucial.
Winning the talent war
Due to the opening of the market, we are already seeing fierce competition for talent – in particular those senior executives with valuable local knowledge, greater understanding of the China market and strong track-records. Those with international vision and capabilities will do especially well.
Llinks Law Offices is a leading Chinese law firm with a preeminent practice in the asset management industry. For a confidential preliminary discussion about the opportunities in China and how we can help, please contact Yang Yuhua or Lv Hong.