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China Beckons Overseas Banks and Asset Managers
Beijing’s new offer of wholly foreign-owned enterprise status has overseas firms eyeing the mainland institutional and retail markets.
Chinas recent decision to open more of its domestic market to foreign banks and investment firms was met with cautious optimism on Wall Street. Banks that had tried to break in for decades griped at the countrys initial model, which required a joint venture with a local firm and a limited ownership stake in that venture to boot. But now that China is offering wholly foreign-owned enterprise (WFOE) designation to overseas players, banks and asset managers are setting up shop.
In June the China Securities Regulatory Commission gave the nod for WFOEs and foreign asset management joint ventures to register with the Asset Management Association of China (AMAC) as onshore private fund businesses. Foreign firms that already own joint ventures will also be able to boost their ownership stakes. The changes drew early applicants including Aberdeen Asset Management, BNP Paribas, Fidelity International, and Franklin Templeton Investments. Although those firms received licenses in 2015, at first they were only allowed to offer consulting services. With AMAC registration, they can include fundraising and some types of investing as part of their business.
David Chang, CEO and regional head for Greater China at Franklin Templeton, says the $850 billion asset manager has been steadily expanding its offerings in mainland China over the past 20 years as the nation has opened its doors. The WFOE license offers us greater business opportunities in the region and reaffirms our firms long-term commitment to Greater China, he explains. It also allows us to meet the growing needs and service expectations of our institutional clients.
Franklin Templeton plans to expand its services to retail and work with local banks and insurers to distribute its products, Chang adds. Meanwhile, the firm has several joint ventures in China, including Franklin Templeton Sealand Fund Management Co. and China Life Franklin Asset Management Co., that it hopes to grow. We will also be looking into the possibility of launching other products allowed within the framework for our clients, Chang says.
Like Franklin Templeton, Fidelity International views China as crucial to its long-term strategy. The $272 billion firm, which has had a presence in mainland China since 2004, now employs some 400 people in Beijing, Dalian, and Shanghai. As Chinese capital markets develop and the renminbi becomes internationalized, Fidelitys strategy in the near term is to create an onshore product in China for institutions and high-net-worth individuals, says Daisy Ho, managing director for Asia ex-Japan. Longer term, our goal is to become a leading player in providing innovative investment solutions to Chinese retail, institutional, and pension investors. Fidelitys WFOE license could win approval by early 2017.
In November, $508 billion Allianz Global Investors, the German wealth management arm of European asset manager Allianz, filed for a WFOE designation. If Allianz succeeds, it will be the third European asset manager to expand into mainland China, alongside BNP Paribas and Credit Suisse Group.
This high-profile move follows a similar effort at Allianzs U.S.-based investment house, Pacific Investment Management Co. John Wallace, a spokesperson for AllianzGI, says his firm views the Chinese mainland as a long-term strategic opportunity. For its part, Credit Suisse is reportedly looking to increase its stake in an existing joint venture there.
The early interest from traditional banks and asset managers comes as a growing group of U.S. and European hedge fund firms are moving into the country. Bridgewater Associates and Och-Ziff Capital Management Group have both applied for WFOE licenses to pursue investment relationships in mainland China. In November the Zhejiang International Hedge Fund Talents Association, Chinas largest independent hedge fund association, announced that it was forming a strategic partnership with the Connecticut Hedge Fund Association, which represents the worlds No. 2 hedge fund center after New York. The alliance, aimed at developing cross-border relationships between U.S. and Chinese hedge funds, is the first of its kind.
None of this surprises James Reichbach, who was recently promoted to Asia-Pacific financial services leader at consulting firm Deloitte. There is a continuing measured move by Chinese regulators to open up the banking market, Reichbach notes. Another example would be the relatively recent opening of the card payments area to foreign financial institutions.
The liberalization of once-closed markets may bring back some banks that abandoned mainland China after being frustrated by limits on foreign investment, Reichbach says. Banks and investment firms playing by the new rules will gain access to Chinas $7 trillion stock market in addition to its significant investor base. Not only are banks interested, theyre doing it, Reichbach says. We expect to see more applications for the WFOE designation in the next year.