A foreign expert shares his view on China's fund management market.
Since 1998, China has approved the creation of 53 mainland fund management companies, about 20 of them joint ventures. International players who have arrived in China include CSFB, UBS, Schroder Investment Management, and Principal Global Investors of the US etc.
However, some of the world's big "pure' asset-management institutions, such as Fidelity or T Rowe Price, have so far shunned the market.
James Walker, a fund-management expert based in Hong Kong, believes the reason lies in the market itself, not in the government policies. CRI's Guan Juanjuan talked to him and the following is the first part of their talk.
CRI: Mr. Walker, in one of your recent articles, you seem to suggest that fewer foreign fund managers arrived in China because of the market itself, not because of the policies. Could you be more specific?
Mr. Walker: Yes, I have been involved for many years in helping sort of as a consultant, working with the Hong Kong Investment Fund Association, and working a little bit with CSRC to try to develop fund management rules, investment fund law, and the rules for foreign fund managers. I think the legal and regulatory framework has really developed very well. And I think the rules are very thoughtful, quite in details in some areas. I think it's a very good framework.
Therefore, I guess the thrust of my article is to try to emphasize that for foreign fund managers, don't blame the regulations, because I think the regulations in China are really well-drafted, are flexible, quite pragmatic, and are really trying to encourage market entrance. The problem has really been with domestic capital market environment.
CRI: So in your opinion, what are the specifics of these problems for the financial market in China?
Mr. Walker: Looking at it from the foreign fund managers' perspective, I think if they come from the US, or Europe, very senior managers, senior executives, they're very positive and keen on China, and to be involved and investing in China. But the second-tier executives and managers are then put under the pressure to build business case, to justify the investment. And if it's going to take them many years to see the return on their investment, then it becomes quite hard to justify making the investment. If the A-share market has been quite difficult for quite a number of years, of course the joint venture fund management companies only have their main root of investment is in the A-share market. So it means they're under quite difficult pressure to get good performance, and to get good return on their efforts.
CRI: I also read some articles from other industrial analysts. In their opinions, the problems of China's market can be summarized as follows, like the stock exchanges do not perform very well. The second one is there are fewer investable products. The third one is the performance of their Chinese partners are not so good. Do you agree with them?
CRI: You mean during the selection of the Chinese partners, they should be cautious?
Mr. Walker: Yes, I think that's probably a good thing in a way, because if the joint venture has difficulties, then...But I have to say in the cases where there have been difficulties, the parties have managed to either find a new partner, or restructure the joint venture, and proceed to continue to work it, which is also another good thing. Think about the regulatory environment has been quite supportive of that.
CRI: As far as the first point is concerned, do you have any idea on how to stimulate China's stagnant stock exchanges?
Mr. Walker: One potential opportunity is obviously the feasibility of QFII (qualified foreign institutional investor)and the ability for overseas investors to invest in the A-share market through QFII. I think, it is an excellent opportunity. I think it will bring long-term benefits. So it's very good to hear that it's likely that the QFII regime will be relaxed in the coming months. And I think and I believe there are rule changes which will help. I think that is an excellent opportunity.
I think if the government can encourage more assets managers, fund managers to apply for QFII licenses. At the moment most of the licenses are with the big investment banks. It should encourage more fund managers to apply for QFII. I think that will help. But the rules need to recognize that the fund managers really act as agents on behalf of their all underlying funds. The rules don't quite recognize this sort of agency-principal relationship the fund managers have. But they would be good long-term investors and would help reenergize the A-share market.
CRI: What should be done as far as the designing of financial products is concerned?
Mr. Walker: That's quite difficult. But I think that one way to do that would to invite some of the foreign banks that have derivative licenses in China, some of the foreign commercial banks that have developed networks in China, some of the joint venture fund management companies, to collectively draw together their skills and to come up with some suggestions of trial products. And then to discuss these with the regulators and to use their experience based overseas, to try to suggest and explain how these products might be worthwhile for broadening choices available, helping to create a wide range of products. That might be one way of doing it.
CRI: Mr. Walker, based on your personal observation, do you think Chinese investors are ready for a wide range of financial products? Because we often heard that the foreign fund managers complain that their products are not bought by the Chinese investors, because investors don’t know what to buy.
Mr. Walker: This is what we call in English expression a "chicken and egg situation". The two are closely linked. Foreign fund managers are very restricted unless they have approved formal establishment in China. So therefore investors are not familiar with their products. But one reason obviously why you want to restrict the products is because the investors wouldn't understand. So it's like a circular argument.
I think you should gradually introduce domestic products, sort of offshore products, then try to educate investors in China about investment opportunities. But I think this is quite a long process actually.
CRI: Personally speaking, are you in favor of Chinese commercial banks setting up joint venture fund management enterprises?
Mr. Walker: It's a useful measure to try to stimulate the development of the market. But I think this should be very careful.
CRI: Why?
Mr. Walker: Because banks are very important in the distribution process. And the issue will arise that banks who own interests in joint venture fund management companies will be tied to distributing those products. Unless the banks are able to demonstrate independence and proper suitability of products, they may end up distributing products which are not necessarily the most suitable for their customers.
Mr. Walker: In the long run I think at least it needs to be regulated. In Hong Kong, we've had something, an issue on banks which have relationships with fund managers, also banks which have fund management entities. They will be promoting products to which they are related with rather than promoting products which are in the best interests of their customers.
Ideally, the banks should be promoting a range of different fund products, managed by a range of different managers,, not necessarily the products which they are tied to through their structural relationships.
CRI: As an expert in the field, what is your advice for China's domestic fund managers?
Mr. Walker: I noticed that there are one or two, actually more than one or two, are very successful. And I believe they have their own ideas about how they would like to grow and expand, including ideas about what they might be able to do outside China.
I think there are fantastic opportunities for those ones. I can understand that they are not too interested in join ventures, because they believe they have skills and knowledge of Chinese market which they can promote outside China. So my advice for them would be to continue to be successful and to try and build business outside China. Investors will be interested in leveraging of those skills.
CRI: But people would be thinking that Chinese market is already a huge market with 1.7 trillion US dollars in personal savings. It would be enough for them to focus on the domestic market instead of going abroad.
Mr. Walker: Yes, in a sense. But markets are changing quite fast. Globalization is putting pressure on everyone to look for asset value in different markets, in different stages of development of different companies. It might be that foreign investors already agree to take a great risk for long-term returns.
CRI: As far as the Chinese market is concerned, there are currently 53 fund managers, including 20 joint ventures. Do you think it's enough for the Chinese market, or it's not a matter of quantity but a matter of quality?
Mr. Walker: I think quality is very, very important. And I think for all regulators, it is the key to regulators in showing you have quality players to come in. They will help pave the way and ensure a good level of good practice and investor protection. But having said that, there needs to be a minimum, sort of critical maths in terms of number. I think the 20 joint ventures will be there for a long time to stay. The real question is how many more will follow.
CRI: That is my next question. How many more will arrive?
Mr. Walker: I think more will arrive. I'm pretty convinced of that. And I think a lot will depend on what happens with what domestic insurance companies can do, how far the domestic banks wish to keep the pressure off to be involved in the fund management area. I guess ultimately what happens with the QDIIs (qualified domestic institutional investors) and what opportunities that will give to domestic institutions as well.
CRI: So it is an open question?
Mr. Walker: It is. But to answer your question, I believe certainly more foreign fund managers will be looking at China. There are a number of companies who haven't ventured, who have been so keen that they have set up rep offices. These are big fund managers who are going to explore and understand the market with a future possibly going into a joint venture. They are taking a distinctively different route.