BrazilRegulatory reforms will see doubling of assets under management in China
China fund managers can expect to benefit greatly from new government regulations in the financial sector according to a new report. The new measures will make the financial products of competing quasi-investment managers less attractive, while also further opening up the market to global asset managers.
Fund managers in China will have a lot more money to play with over the next five years. In a recently released study, global management consultancy Oliver Wyman predicts that assets under management (AUM) in China will almost double from $7.4 trillion this year to $14 trillion in 2022. This follows a rise from just $1.6 trillion in 2012 and will continue an ‘explosive’ CAGR of approximately 10% to reach a 15% total global market share.
At present, China lags behind in the value of its AUM in comparison to the US and Europe. According to advisory firm Willis Towers Watson, US fund managers’ assets amounted to $47 trillion in 2016, while European managers looked after $25.8 trillion in assets. The dynamics that account for China’s relatively low AUM figure, however, are shifting.
One driver for fund manager asset growth is the surging level of investable wealth among high-net-worth individuals (HNWIs). Analysis by strategy consultancy Bain & Company late last year calculated that the number of HNWIs in China – with assets over $1.5 million – has climbed from 181,000 in 2006 to over 1.8 million in 2017. The Oliver Wyman report expects the total investable wealth among China’s HNWIs to rise from $8 trillion in 2016 to $17 trillion in 2022.
Further, new Chinese financial regulations will shift more money toward traditional fund managers, according to the firm. Quasi-asset management, which consists of wealth management products (WMPs) offered by Chinese banks, will in contrast suffer. WMPs are uninsured financial products that offer a high rate of interest and, sometimes, a guaranteed return. They are currently very popular among Chinese investors, with a value of $11.4 trillion this year and a 61% share of total AUM in China.
However, Chinese regulations will make WMPs much less enticing. One regulation removes the guarantee of principal repayment, removing a large value proposition for WMPs. Another prohibits the common WMP practice of “product nesting”, wherein funds are further allocated to another layer of financial products managed by other asset managers. As a result, the authors of the report expect that ‘traditional’ managers will carve out a ~45-50% of the total AUM in China over the next five years.
Ray Chou, Managing Partner at Oliver Wyman, commented, "Asset management regulation has... basically constrained the further development of 'quasi' asset manager and moved the industry towards a more healthy and professionalised active product management that will really help the industry to grow in the right direction."
The report also notes that China has made further regulatory changes to signal to foreign asset managers that China is ‘open for business.’ The Chinese government has removed foreign ownership limits for mutual fund management companies and has granted the ability of foreign asset managers to set up wholly foreign-owned entities. As such, Oliver Wyman sees this as an unprecedented moment of opportunity for global asset managers.
Still, there remain certain differences in the Chinese market which make for a difficult landscape to negotiate for global players, marked by low diversity in investment strategy. This is due to several reasons according to the report, including “a lack of financial instruments like options and inefficient capital market structure.” Further, “Short-selling is not prevalent and not encouraged by regulators,” while the “domestic market is isolated from global markets due to capital controls. All of these have limited the variety of potential investment strategies for managers.”
“Entering China will not be an easy task for global players,” the consulting firm concludes, “However, the potential prize is worthwhile for those who make the right moves… In order to successfully establish their presence in the private securities market, global asset managers must identify their target proposition in China, and then consider how to best leverage their global capabilities to achieve that, and identify where building local capabilities and partnerships are needed to better fulfil the target proposition.”
