This article first appeared in the June 2021 issue of Investment & Pensions Europe.

A recovering Chinese economy is creating opportunities for asset managers around the world. But after the sugar rush fades, the ones with the deepest expertise in the region stand to reap the biggest long-term gains.

China’s gross domestic product grew a staggering 18.3 percent in the first quarter of 2021 compared with the same quarter a year earlier, the biggest increase in quarterly records dating back to 1992, as the spectre of COVID-19 begins to lift from the world’s second-largest economy.

The surge is likely to set off a virtuous cycle in which foreign capital pours into the market to take advantage of the growth, which, in turn, helps boost the wealth of Chinese citizens further. Even in the pandemic year of 2020, the Chinese asset management industry experienced growth, as assets under management (across all asset management licenses) increased to RMB 117 trillion from RMB 108 trillion.

The continued growth is luring global players to set up onshore in China, despite the pandemic. Allianz, BlackRock and others have received licenses to create onshore asset management operations. Many other global players are taking stakes in onshore asset managers or forming joint ventures with them.

So where are the biggest opportunities? It depends on the category.

For offshore, inbound business (that is, global capital allocated to China), there will be massive opportunities for global players with strong investment capabilities in China. In general, while Chinese players are actively expanding overseas, global asset owners still typically prefer global asset managers who have more compatible investment and risk management policies and operations. But over time, as the allocations to China increase, investors will search for more “alpha,” or outperformance above the benchmark.

As that unfolds, the market is likely to shift from a volume game – providing exposure to as many investors as possible – to a quality game in which firms can offer the ability to originate and acquire exclusive assets. That will require strengthening relationships with Chinese partners and regulators. Western firms in particular will have to think through how to synergize across the capabilities built onshore and client access from offshore.

Two types of demand

For offshore, outbound business (that is, Chinese wealth allocating overseas), the future is a bit murkier. We anticipate seeing two types of demand, one being the search for Chinese assets listed abroad, and one being global allocation. While global players might have an edge in the latter category, it depends heavily on how fast the maturity of Chinese investors pick up the concept of global asset allocation, whether they will resonate with the latest initiatives such as the Greater Bay Area Wealth Management Connect scheme.

For onshore business (Chinese wealth allocating in China), China will remain as a semi-captive market. Going after local retail and institutional clients will still require a strong local partner or deep relationships and expertise in-house. Over time, we expect to see more onshore operations by global players, and there will be first-mover advantage considering brand affinity and talent.

Now that the pandemic is beginning to ease, China will begin to have time to dive into issues that were put on the back burner last year, such as pensions, as we outlined in a recent World Economic Forum report.

Given the influx of global players into China and the setting up of local champions there, we anticipate Chinese regulators will work with the industry to drive more innovation in one of the world’s most exciting markets.