BBH’s Global Regulatory and Market Strategists Carla Jane Findlay-Dons and Adrian Whelan recently travelled to Hong Kong and Beijing to discuss market hot topics with local clients and industry leaders. Adrian had the honour of delivering a keynote speech at the Asset Management Association of China’s International Business Committees Conference and they also managed to squeeze in a little fun. Here, in Part 4 of a 4-part series, he shares his personal China experience. Click here for Parts 1, 2, and 3.
As I began to pack up for the 17-hour return journey back to Dublin, I was excited to get back to my family, but I also knew I would leave a little of myself in Asia. I will undoubtedly be a more frequent visitor in the coming months and years. I was able to better grasp the breadth of the evolving asset management opportunities in the Greater China region by being on the ground. Many of the policy initiatives that were once theoretical are fast becoming practical realities. The scale of the Beijing building structures is only matched by the scale of asset manager ambitions and opportunity.
Travel certainly broadens the mind, but this trip more served to validate many of the trends and themes that clients I’ve been engaged with have been focused on in Greater China for some time. These trends are crucial since asset management is inextricably globally interconnected; the China policy of market liberalization and global integration is every bit as important in the grand scheme of things as any other global developments currently in focus.
There are some lessons here for global asset managers – what has proven to work in one’s local markets will not automatically work in another market, particularly in China. An oft quoted phrase when discussing the China market is that it is a “learn by doing market.” There are behavioural and cultural nuances which must be acknowledged and methods of financial product distribution in China are wholly different to other distribution markets.
It seems probable that wholly foreign owned enterprises (WFOEs) will ultimately succeed in China. However, ambitions are tempered somewhat by the inherent limitations on foreign firms that currently exist. WFOEs may only provide private fund management services until they have a full unblemished three-year track record. Then, they can apply to convert to a full onshore management licence and access the lucrative mainland China retail segment. As such, asset managers should consider a phased approach and assess realistic expectations on time horizons within market entry planning.
Another point of interest from talking to the Chinese asset management delegation was their excitement and welcoming attitude towards the expected arrival of foreign asset managers into the Mainland market. Many believe such arrivals will add additional reputational legitimacy to the market, further institutionalization of a heavily retail dominated stock market, assist to develop and enhance portfolio management techniques in the China market, and generally act as a catalyst to “raise all boats” in the industry. Encouraging news for those considering market entry indeed.
On final reflection of the recent positive policy revisions, it appears inevitable that Greater China will become a more significant part of the global asset management ecosystem in the coming months and years. I have long maintained that appropriate levels of prudential regulation can act as a sturdy foundation for growth, and it does now appear that China has a desire to integrate in a more material and permanent manner into the global capital markets. Here are just some of the changes likely to impact global asset managers in the foreseeable future:
- Continued growth in demand for China’s securities with phased inclusion of stocks into MSCI indices and ease of access to Chinese securities for international investors through the Stock and Bond Connect programs
- Granting of new and increased Renminbi Qualified Foreign Institutional Investor (RQFII) licenses and quotas to foreign asset managers allowing them to invest into onshore Chinese assets
- Continued facilitation of WFOE application process and ownership rules to make it easier for more foreign owned asset managers to set up in Mainland China to offer certain onshore investment products with a view to obtain a full onshore licence in due course
There are also macroeconomic projects which will put Chinese asset management front and centre. Both the Hong Kong and Beijing governments are putting their collective muscle behind the Greater Bay Area (GBA) initiative – an ambitious economic plan to foster innovative business and infrastructural development. The GBA includes some of China’s most dynamic hi-tech cities including Hong Kong, and Shenzhen. Much of the new economic activity is expected to include a large cross-border element giving global asset managers opportunity to participate.
For global asset managers, the opportunities in China can’t be ignored. And with policy shifts likely on the horizon, we will no doubt be writing more about the region in the coming months. I look forward to returning to the region soon. Maybe next time I’ll actually meet Mr. Alibaba!
Until then, China, Zài Lián Xì – Let’s stay in touch.