China represents a potential windfall for foreign asset managers, but firms entering the Chinese market must have patience and faith, according to industry observers.
The Chinese fund industry requires patience because it is in its first stages of development and is being built from the ground up. And if a foreign player wants to capture a percentage of the estimated $1 trillion in savings deposits and the untold billions socked under mattresses, it will have to have a good measure of faith. That's because there are no hard and fast rules outlining how these new partnerships will work or, for that matter, specific regulations for the country's burgeoning fund industry, said Norman Sorensen, president of Principal International Inc., Principal Financial Group's international division.
Currently, there are approximately three open-end mutual funds in the Chinese market. The first was launched late last year, he said. "[It is]a very young industry living within a precarious and still-to-be-regulated environment," he said.
However, the Chinese asset management industry must meet a series of upcoming deadlines in order to comply with standards set by the World Trade Organization. By joining the WTO in December, China agreed to allow foreign investment companies to establish joint ventures with Chinese partners. Foreign partners will be allowed to establish a 33% share of the joint venture by December 2003 and raise their stake to 49% by December 2004. Within five years of its entrance into the WTO, China is supposed to allow foreign firms, such as banks, to leverage their branch networks as sales platforms.
But the WTO rules are broad guidelines for the industry and before joint ventures are established, Chinese and foreign firms are waiting for more specific rules. That duty is the responsibility of the Chinese Securities Regulatory Committee (CSRC).
"Without clear regulations and transparency, it is hard to reach an agreement with a joint venture partner," Sorensen said. Chinese Premier Zhu Rongji has made it clear that he wants the securities regulatory process hammered out by the CSRC before he steps down in March 2003, Sorensen said. If that does not happen before a new premier assumes leadership, the process could be further delayed, he said.
But the bare minimum in terms of skill and reputation that a foreign entity needs to have if it wants to partner with Chinese asset management firms is more clearly defined. Firms need to have at least 10 years in the asset management industry, a high level of solvency and management with squeaky-clean backgrounds, Sorensen said. Moreover, in addition to the costs of competing in the Chinese market, foreign companies will likely have to pony up between $25 million and $50 million in capital to establish a partnership, he said.
But industry observers believe the potential of the Chinese asset management business far outweighs the risks. China has a vested interest in allowing foreign players into its asset management industry because it needs outside experience to help establish and build the industry, Sorensen said.
While there is a level of risk, it is worth it, Sorensen said. "China can't afford the glass to be broken," he said. "China needs the foreign expertise, so they will bend over backwards to make sure the regulatory process is transparent."
Although China has agreed to the WTO's standards and the CSCR is working on the details of a regulatory structure, many firms have already established technical agreements with Chinese firms in which the foreign company provides advice and technology needed to build and run funds, Sorensen said.
In fact, those agreements are likely forerunners to joint ventures, said Shiv Taneja, an analyst with Cerulli Associates. One such agreement between Fleming Investment Management and Hua'an Fund Management Co. resulted in the launch of the country's first open-end.
Other firms such as Schroeder Investment Management, Dresdner Asset Management, State Street Global Advisors and Fleming Investment Management and Principal Financial appear committed to wait until they have a more concrete understanding of the regulatory playing field.
Currently there are approximately 75 closed-end funds in China, Taneja said.