China’s recent economic slowdown has attracted significant attention from investors: GDP growth in the country decreased from 10.6% in 2010 to 6.9% in 2015. However, this is still a very healthy rate. International asset managers should keep their sights set on China: In fact, asset management opportunities in China continue to grow, nurtured by strong long-term economic fundamentals, increasing sophistication and deregulation, as well as positive cross-border trends. In their new study, “China: The new frontier for foreign asset managers”, Roland Berger experts predict that the market assets will double in volume by 2020 to USD 8.5 trillion. Moreover, the demand for Chinese onshore products from global investors is expected to grow 34% a year, reaching a volume of USD 934 bn in 2019 (based on a 2013 to 2019 compound annual growth rate, CAGR).
“Foreign firms need to position themselves to secure their share of the pie,” said Alain Le Couedic, Partner at Roland Berger. “Faced with historically low yields, many Chinese investors are looking for new investments.” According to the report, Chinese investors are willing to shift their portfolio toward riskier asset classes such as stocks. As a result, the volume of outbound investment is on the rise as well, a sweet spot for global asset managers. Especially among affluent Chinese the demand for offshore investments will grow by 8% annually and rise to more than USD 1.5 trillion by 2019 (based on a 2013 to 2019 CAGR).
Ongoing deregulation provides foreign companies with increasingly favorable market entry opportunities in China
Qualified Foreign Institutional Investor (QFII) quotas have been extended to 279 institutions up from only 93 in 2010, having quadrupled in size since then to about USD 81 bn as of December 2015. This is one of the results of a number of deregulation initiatives initiated by the Chinese government. “Over the past two years, Chinese regulators have unveiled significant liberalization measures, and addressed concerns over capital markets accessibility to encourage capital inflows and offset the drop in foreign exchange reserves,” commented Le Couedic. Asset managers will benefit from such changes as these measures make cross-border investments easier with simplified application processes, wider usage, greater liquidity and flexibility. “Additionally, foreign firms now have more channels through which to meet their global investors’ appetites for Chinese underlying assets,” explained Le Couedic.
Product innovation – a key opportunity for foreign players
As the Chinese capital market matures, the Roland Berger experts expect the demand for sophisticated investment strategies to increase. Asset classes such as quantitative products, private debt, hedge funds and private equity are still of limited supply domestically, but are highly sought after by High Net Worth Individuals (HNWIs) and institutional investors. “With developed alternative asset management franchises in other international markets, there is ample room for foreign asset managers to leverage their expertise and capture market share as the alternative investment market grows in China,” outlined Le Couedic.
In addition, the structural aging of the Chinese population is also impacting the asset management market positively. By 2050, senior citizens will make up more than 30% of China’s total population. This structural change underlies the government’s efforts to set up a sustainable retirement savings system. “China’s pension system is still at a nascent stage of development, but pension funds are expected to quadruple by 2020, an opportunity not to be missed for foreign players,” commented Le Couedic.
Over the past few years, the asset management industry in China has been shaped by a number of interesting product innovations. Among them are Money Market Funds from internet giants, which disrupted the traditional market. Promising annual returns as high as 8%, these funds raised awareness for mutual funds among Chinese retail investors, highlighting their role as an alternative to direct securities investments. “In 2015, Chinese mutual fund assets nearly doubled, hitting a new high of USD 1.5 trillion. This increase was mostly driven by inflows into MMFs,” explained Le Couedic. “A booming MMF segment is in fact the most striking example of China’s unique growth pattern. Indeed, China’s mutual fund market still differs significantly from mature markets, growing 94% between 2010 and 2014 compared to -1% in the US or -3% in Japan (based on a 2010 to 2014 CAGR).”
Challenges faced by foreign asset managers
Despite the recent relaxations, players should not expect smooth sailing in China’s asset management market. Evolving legal entity status requirements see foreign asset managers confronted with strategic choices. Further, over the past few years new channels such as online and independent financial advisors have started to emerge, generating new opportunities but also adding complexity to China’s distribution dynamics. “New digital players are flocking to the market from a wide range of industries. These new market entrants come with sky-scraping ambitions as well as large pre-existing user bases and solid digital platforms,” said Le Couedic. Another of the major difficulties faced by foreign asset managers when building a “China strategy” is talent acquisition. Indeed, domestic players’ competitiveness has increased significantly over the past few years, making talent acquisition and retention even more challenging.
