China’s asset management industry has grown over 60% annually for the last three years and is expected to grow at least 24% for the next ten years. Factors influencing growth include increased investment market in general, the very beginings of a retirement industry and rapidly growing needs in insurance.
In the past 5 years, foreign asset managers have pored into China but are limited to joint ventures and minority shareholdings and a 49% limitation on foreign ownership of a Chinese/foreign partnership. In addition, Chinese investors move money around at a much quicker pace and long term ownership is practically unheard of. In fact, most asset management firms see ownership 100% churn every two years leading to endless need for sales and new investors. Also, due to intense competition, fees are so low that it is difficult to turn a profit much less match Western standards for returns.
However, for the strongest players, 2007 saw some of the largest returns in the history of the industry: 100%+ New asset management firms have heeded the siren call and, despite the high churn and low fees, are in China to stay. The key is to create a structure that allows for high churn while creating value for clients on both sides of the equation. Branding is also a major factor in longevity and sustainability.
Currently Chinese investors are limited to real estate, equities and simply depositing money in the bank. However asset managers hope that China follows Japan’s path and that mutual funds will eventually take hold in the market. The rapid greying of Chinese society is forcing investors hand according to Bungo Ishizaki of Efficient Equity. “Reduced government pensions, runaway inflation, sky high real estate prices and the lure of Shanghai’s sometimes high flying equities have increased pressure on the financial market to supply consumers with new financial instruments to choose from”.
In an effort to place Shanghai in a world leading role by 2020 the government is rapidly removing barriers to yuan convertability, deregulate the corporate-bond market, raising corporate governance standards and increasing transparency. Currently Chinese companies control approximately 70% of the market. Many experts see investment advice as an area that foreign firms have an edge over Chinese rivals. Giving good advice on market direction, providing critical risk analysis and openly answering investors questions in education seminars. Many unusual practices remain in the market such as the practice of splitting shares in an effort to be the cheapest on the market due to the lingering belief that a mutual fund whose price is low is “cheap”.
Due to the near monopoly of China’s 4 largest banks, many foreign asset management firms have partnered with China Merchants Bank which has shown the ability to sell out subscriptions in the first day of offering. The key is to train the sales force to sell your products over another foreign invested asset management firms. Another avenue to sales in China is to create a sales channel with their own asset management arms and avoid the risk of losing favor with China Merchants Bank. Having a sales channel also creates brand loyalty and gives a foreign firm greater local knowledge of buyers tastes and preferences. For example, Fidelity Investments has coupled a strong sales channel with a robust online sales ability. Creating a proprietary sales channel and building a unique wealth management clientele is the key to differentiation of services and will help a foreign asset management firm to create a niche with staying power in the Chinese market.