Because of a series of regulatory developments in China this year, foreign fund managers are expected to expand the scope of their onshore private fund entities and enter the public market earlier and more smoothly. Still, they face plenty of hurdles in their efforts to expand operations in the domestic market.

These are some of the main findings of Cerulli Associates' newly released report, Asset Management in China 2019: Setting the Right Strategies.

So far, foreign managers have been allowed to raise funds onshore and invest onshore only, through wholly-foreign-owned enterprise (WFOE) private securities fund managers (PSFMs).

Notices of proposed rulemaking

However, in a proposed guideline released in January this year to merge the Qualified Foreign Institutional Investor (QFII) and RMB QFII schemes, quota holders ought (if all goes well) to be allowed to invest in onshore private securities funds (PSFs) and to appoint their affiliated WFOE PSFMs as investment advisors.

In June the China Securities Regulatory Commission (CSRC) unveiled a plan to allow WFOE PSFMs to invest in a broader range of securities on the Mainland-Hong Kong Stock Connect.

Last month the State Council announced that the removal of foreign ownership limits on public fund companies would be brought forward from 2021 to 2020. Eligible foreign fund managers will be allowed to convert their WFOE PSFMs into public fund companies, while allowing for continuity of business, according to the policy outcome of the 10th UK-China Economic and Financial Dialogue. Foreign managers will be able to have fully controlled mutual fund companies earlier, with lower transition costs, while retaining minority ownership in their mutual fund joint ventures.

Many WFOE PSFMs have found it bothersom to raise funds in China because people do not recognise their brands, they have no onshore track records and they lack distribution networks. As they try to target the HNW market, they should be aware that more obstacles may lie ahead.

A word from the analyst

Miao Hui, a senior analyst at Cerulli in China, told Compliance Matters: “Banks’ newly set-up wealth management subsidiaries will crowd out the mass-retail market and distribution space, and could eventually move into the institutional sector as they mature. In addition, many domestic managers have been trying to develop strategies quickly to gain first-mover advantages in the less-crowded passive space since 2018, despite the declining margins and fee pressure. More players [are] deepening their participation in asset management following the ‘super guidance.’”

At the time of writing, almost all major global asset managers have shown interest in or have already ventured into China. Cerulli believes that most of them have long-term plans to expand in the market, but the competition could be more intensive when they can officially join the retail space on their own. It says that they should continue to expand their PSFM businesses — which are crucial to establishing their onshore brands — by offering differentiated strategies (such as quantitative, multi-asset and multi-manager) and by making early preparations to collaborate with banks and third-party online platforms in the public market.