Investment: AUM in China set to pass $1 trillion
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Investment: AUM in China set to pass $1 trillion

Mutual fund growth will revive; Renminbi liberalization a key factor

Growth in China’s mutual fund management business has stalled since 2007 and assets under management are 30% down on their pre-financial crisis levels.

But as capital market reform starts to take hold, and the middle class continues to expand, domestic Chinese asset managers and, to a lesser extent, foreign investors, have high hopes that the sector will flourish.

The gains will be driven primarily by equity marketsand net inflows from new investors.

Despite the declines of the post-crisis period some fund management sectors, beyond mutual funds, have flourished, with assets in private funds rising sharply as short-term bank wealth management products spring up by the month. On the institutional side, sovereign and retirement funds also continue to grow. The institutional market has grown healthily, with assets up to Rmb25 billion ($3.9 billion) from Rmb7.5 billion in 2007.

Citi’s Asia head of securities and fund services David Russell, Greater China
Citi’s Asia head of securities and fund services David Russell, Greater China

A report by Z-Ben Advisors, an independent consultant, commissioned by Citi and authored by Peter Alexander, says several factors are converging, meaning growth in mutual funds will kick upwards, driving growth in the wider Chinese asset management business. It says assets under management will reach at least $1 trillion by 2015. However, the report pointed out that for the asset management business to continue to thrive, it would have to overcome issues including the turnover of personnel. Competition from other segments – such as brokerages, private funds and insurance asset managers – has meant the most skilled fund managers are often difficult to retain. As part of the growth, says Citi’s Asia head of securities and fund services David Russell, Greater China is set to become a separate asset class from the Bric countries. Global investment portfolios will shift to gain greater exposure to this market. Chinese managers – with the advantage that they enjoy the support of the government – are likely to drive much of the growth, as opposed to the foreign managers that have tried unsuccessfully for many years to crack the Chinese market.

Of particular interest to many in recent months has been the growth of the offshore renminbi marketsand hopes have been high that they might present an opportunity for foreign investors to invest in mainland China.

Late last month China moved to lower barriers to foreign ownership of local securities, allowing smaller fund managers to enter a market previously restricted to the largest global asset managers. Previously only those with assets under management of at least $5 billion were allowed into China’s qualified foreign institutional investor (QFII) programme. China is also considering allowing qualified foreign investors to hold stakes of up to 30% in listed companies, up from the current cap of 20%.

Another factor at play for asset managers is the growing internationalization of the renminbi. This means there are now large pools of offshore renminbi that can’t simply be invested back into China without approval except by Chinese asset managers.

The RQFII scheme allows Chinese financial firms to establish renminbi-denominated funds in Hong Kong for investment in the mainland. RQFII also allows institutional investors outside China to facilitate investments of offshore renminbi deposits back into Chinese capital markets. So far, several Chinese asset managers have been approved under the scheme, giving them a potential head start in accessing the growing pools of offshore renminbi to invest back into China.

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