Since China opened up its domestic financial market, many global players have entered the scene. Wealth and fund management are two main areas that foreign institutions have been focusing on, either through collaborating with local partners or establishing joint ventures.
Over the past three years, however, the growth of the overall assets under management (AuM) in China’s asset management industry has been stagnant. The consumption and investment confidence remain relatively weak. Challenges have arisen with a shift of focus to residential deposits.
On the other hand, mutual funds have emerged as the top AuM contributor, as the devaluation of banks’ wealth management products has resulted in a wave of redemptions since 2022. These structural changes result in potential opportunities for foreign players to further build their asset management business in China.
Focus on Chinese wealth and fund management for foreign players
In the past two years, foreign institutions have set up wealth management companies (WMCs) in cooperation with local banks. Some have collaborated with large state-owned enterprise banks to become their second WMC, leveraging the nationwide sales network of their counterpart and obtaining controlling interest of the new entity. Others have collaborated with joint stock banks, or city commercial banks or rural commercial banks, providing asset management capabilities for the new entity.
For fund management companies (FMCs), foreign players still primarily establish joint ventures (JVs). The Chinese shareholders usually operate these through local management teams, so they face similar problems to most local FMC peers. One is the pressure on profitability. The China Securities Regulatory Commission has issued various policies since July 2023 to reduce management, custody, and commission fees across the industry within two years. Another is the new online battle for retail investors. Fast-growing FMCs have placed emphasis via online channels for retail investors. Online channels have contributed an estimated 60% of new investors and 45% of new AuM in the last three years. The challenge for JV FMCs is to optimize their channel management to accommodate this online shift.
Since the liberalization of the share ratio for foreign shareholders in 2021, the number of approved wholly foreign-owned enterprise (WFOE) FMCs has risen to nine. Three of them were converted from JVs. They completed equity changes in 2022 or 2023, inheriting the AuM, sales channels, and part of the local investment and research capabilities. The challenge now is to transform and improve each company’s products, investment, and research capabilities to better leverage shareholders’ asset management capabilities in the global market. Another six greenfield WFOE FMCs, meanwhile, are still in their infancy and their AuM growth has been relatively low, indicating they still need time to build localized products and sales channels.
Three opportunities for WFOEs and JVs in China
Offering offshore fixed income opportunities to meet growing local demand
Despite being highly limited by quotas for overseas investment, offshore fixed income offers significant market potential. This opportunity arises as Chinese institutional and corporate clients exhibit a strong demand for fixed-income strategies, which already account for 70% to 75% of the cumulative AuM.
While the demand for offshore allocation is robust, local players’ supply capabilities are insufficient to meet this demand. Moreover, a big factor for the rapid growth in offshore allocation is the weakened overall returns for onshore investments since 2020. Take Qualified Domestic Institutional Investor (QDII) products as an example. Since 2020, the compound annual growth rate (CAGR) of QDII products has been 43%, while the CAGR of non-monetary products has been only 10%. Leading Chinese FMCs have also almost exhausted their QDII quotas. Clearly, there is still a significant gap in the global asset allocation capabilities between leading domestic and global players.
Global players can capture this opportunity by leveraging a combination of various overseas investment channels and quotas. These would include ones relating to, among others, the QDII and Qualified Domestic Limited Partnership programs, and Bond Connect. With this approach, global players would be able to maximize their ability to allocate assets across multiple overseas markets, and thereby offer offshore fixed income opportunities to meet the growing demand in this area.
Collaborating with market partners to reach high net-worth individuals in smaller cities
Another market opportunity is to collaborate with channel partners to establish market connections with the untapped client segment of high-net-worth individuals (HNWIs) in lower-tier cities and senior groups. Many of them have not had the opportunity to explore more asset management options due to channel limitations and a lack of awareness.
In our view, it would be best to collaborate with city commercial banks in emerging affluent regions, such as Zhejiang and Fujian, and online wealth management platforms. Such collaborations would enable asset managers to expand their reach to a wider client base and connect with the right people looking for solid investment opportunities.
Effective investor education and channel empowerment are crucial for unlocking the full potential of this client segment. Sharing professional investment insights and providing training support to the channel personnel, particularly to the relationship managers, can enhance the conversion rate significantly.
Improving investment experience to regain client trust
The historical returns from segregated accounts or private funds have failed to meet the expectations of clients to date. In return, these clients adopted a wait-and-see attitude over putting more funds to work. Clients, particularly HNWIs, to provide products and services that offer better returns, controllable volatility, and a comfortable investment experience.
Asset managers who can provide clients with an improved investment experience can also unlock a potentially huge market. The heightened experience would result in the asset managers regaining client trust so that more business can occur. According to our observations of China’s leading FMCs, the companies have already started improving the conversion of their HNWI clients by sharing their in-house trading signals and other trading edges.
Whether by offshore fixed income, collaboration with channel partners, or improved investment experience for HNWI clients, the niche opportunities in China’s asset management market have significant market potential.