The catalyst for the recent changes has been a desire by Chinese regulators to ensure that QFII is a credible competitor to investments made via Stock Connect, the cross-boundary investment channel that links the Shanghai, Shenzhen, and Hong Kong Stock Exchanges. Stock Connect has allowed foreigner investors buy China A shares listed on the mainland in a less restrictive manner. But now, the lessening of restrictions effectively means that Stock Connect and QFII will promote one another.
Big players arrive
In an important development this year, BlackRock – the world’s largest fund manager - became the first company to take advantage of new rules that allow foreign companies to have 100% ownership of FMCs, a type of fund management company that can launch retail funds in China.
Some overseas companies might have a long-term plan to have an FMC, but typically start out with just a small office.
From an end-investor perspective, some delegates participating in the event questioned whether the prospect of unattractive returns from cash savings would drive interest in new wealth management products that are likely to appear as a result of the changes.
The number of mutual funds has been growing rapidly. Further growth will, no doubt, be driven by a surge in the personal wealth of China, and a desire for more products, as returns from cash remain unappealing.
The growth of the Chinese economy has created substantial wealth for the growing number of middle-class families in the domestic economy. A 2021 report by HSBC states that household wealth is likely to grow by 8.5 per cent, annually, over the next five years.
However, delegates at the webinar acknowledged there is now demand for more sophisticated and customised wealth management products as domestic wealth grows.
Ultimately, investors are looking for a better investment experience and products that address individual objectives, with a global asset solution.
Investments into China
Delegates also noted that there had been substantial interest from investors in UCITS funds in recent months. Strategies in a UCITS structure that have a dedicated exposure to companies in the Chinese economy stood at nearly $100 billion at the time of the webinar.
Delegates explained how well-known names in the US and Europe were taking most of the market share, with JP Morgan, Fidelity and UBS are among the top players.
Chinese asset managers currently account for just 0.66% of the assets under management although most fund groups that offer these structures were witnessing inflows, delegates said.
Flows into the largest asset managers were attributed to the size and marketing abilities of these companies, rather than the lack of capabilities of smaller managers. One delegate explained that Chinese asset managers are expected to be more explicit about their strategies and why they are entering the market, whereas larger managers are often trusted without the same level of scrutiny.
But Chinese managers could utilise their rich experience and local knowledge to participate in running Chinese funds, attendees said. But if they are to compete with global household names, they will need to offer a high degree of transparency.
Chinese managers will also need to gain diverse distribution experience to compete effectively on the global stage, and better understand the investor behaviours in the different countries of Europe.
Sub-sectors offering appeal
Within private equity, specifically, delegates examined why many managers are now looking closely at China. Some on the panel said they expected growth here too.
Foreign mangers can apply for the Qualified Foreign Limited Partnership (QFLP) scheme to access the private equity market. At least 20 10 cities, including Shanghai and Beijing, now offer subsidies launch local programs to those entering the local market.
Elsewhere, opportunities in new energy, biotech, entertainment, and the healthcare sectors were those recognised by delegates as being the most popular due to the expectation that these sectors will underpin China’s growth. The food waste and medical waste industries were identified as potential targets, too.
How can Apex help?
Operational since 2008 in China, we have a team of 40+ locally based professionals who understand the market and deliver on-the-ground services to serve our Hedge Fund and Private Equity clients. We provide a range of fund, corporate/business & ESG services.
Today, the Apex Group arguably has the most diverse range of solutions to offer the market out of any of the main service providers, ranging from traditional fund accounting and depositary services to corporate and SPV services, right through to newer innovations like ESG ratings and advisory solutions including digital banking.
