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Foreign Firms Embrace Chinese Onshore Status, COVID-19 Slows Progress - Study

Editorial Staff

11 September 2020

Foreign financial firms, including wealth managers, will be able to boost their onshore Chinese presence because of a regulatory drive by Beijing, but COVID-19 will drag on movement, according to a new report from .

While China is at loggerheads with the US and other countries on trade and other issues (Hong Kong, human rights issues, movement in the South China Sea, etc), the Asian giant has been freeing up its capital and investment markets. A number of firms, such as BlackRock, JP Morgan, Fidelity and Neuberger Berman, have applied to become wholly foreign-owned fund management companies. JP Morgan, for, example, recently agreed with its Chinese partner, Shanghai Trust, to boost its stake in a joint venture to 100 per cent. 

Since 1 April, foreign ownership limits on fund management companies and securities firms have been completely removed in China. Eligible foreign managers are now allowed to set up foreign-owned FMCs directly or convert their wholly foreign-owned enterprises (WFOEs) for private securities fund (PSF) businesses into public FMCs. 

Draft guidelines proposed by the China Securities Regulatory Commission governing FMCs in July 2020 could widen ownership freedom, replacing the old “one minority, one controlling” shareholding principle with the “one minority, one controlling, and one licence” principle. 

As a result, a single financial institution can invest in no more than two FMCs and can only hold a controlling stake in one of them; in addition, it may have a controlling stake in another public mutual fund licensee, Cerulli said.

“Cerulli believes the rule would further intensify industry competition, and the retail fund management business will then be further opened to banks, securities firms, and insurers, in addition to their affiliates’ existing asset management businesses,” it said. 

Already, foreign managers have entered JVs with local banks’ wealth management subsidiaries, securities firms, and insurance asset management companies.

“The draft rules in July state that a foreign shareholder should hold a good reputation internationally, with decent performance in assets under management, revenues, and profits. This could be interpreted as favouring large global fund houses wanting to enter China,” Ye Kangting, senior analyst with Cerulli, who leads the China research initiative, said. 

“Nevertheless, market penetration takes time, and foreign asset managers should leverage their global expertise while striving for localisation by hiring local talents, as well as building track records, improving their brand awareness, and strengthening their relationships with both regulators and distributors,” Ye Kangting added. 

There are several examples of firms using the post-April freedoms. Chinese authorities approved Credit Suisse’s move to become a majority shareholder in its securities joint venture, enabling the Zurich-listed bank to ramp up activities in China. The JV, which is called Credit Suisse Founder Securities Limited, was set up in 2008 and is based in Beijing. Credit Suisse’s shareholding in CSFS will rise from 33.3 per cent to 51 per cent. In January 2019, Citigroup agreed to sell its stake in its Citi Orient Securities joint venture to its Chinese partner. A few days ago, Japan’s Daiwa Securities Group, which received regulatory approval to launch a majority-owned joint venture in China, also has a 51 per cent stake in it. Beijing State-Owned Capital, an investment vehicle of Beijing municipal government, owns 33 per cent in the joint venture, while an investment arm of Beijing’s Xicheng District holds 16 per cent.