Foreign AM losing out in fierce competition in China

Evonne-Gan_Cerulli Associates

Evonne Gan, Analyst at Cerulli Associates

By Emily Lai

Asset management is a young and dynamic industry in China with robust growth. According to figures from the Asset Management Association of China (AMAC), 6 new Chinese asset managers joined the market last year leading to 95 counterparts; overall AUM grew 58%, from 4.22 trillion RMB to 6.68 trillion RMB as of the end of last year. However, players do not see a level playing field. According to Evonne Gan, Analyst at Boston-based researcher Cerulli Associates, foreign fund management companies’ (FMCs) outlook remains gloomy because of the lack of comparative advantage in the fierce competition.

Competition for assets

The industry itself is competitive with the fast growing number of participants and undifferentiated products. However, further competition came from outside the industry as well. Money is being diverted to other channels other than traditional mutual funds, including the peer-to-peer (P2P) products, trusts, and wealth management products. These new inventions work with the same proposition – that they can generate a fixed yield over a specific period of time.

Only money market funds with sufficient scales can compete meaningfully with these new inventions, leading to slanted negotiation powers in the mutual fund business. FMCs with strong pricing power, eye-catching performances, or a strong brand name gain easy wins, creating a barrier for new foreign players to focus on this business in China. Although online distribution is a possible alternative, competitions are even more intense and deep pockets are needed to navigate it.

The situation is more acute in the institutional front. The pension business is limited to a selected pool of managers that are long established in the country. It is virtually impossible for new players to get an Enterprise Annuity (EA) license or secure mandates from the National Social Security Fund (NSSF). Tapping into the potential assets that are now permitted to enter the local equity market from the basic pension system will be a long-term process, and favoring mostly qualified managers who are closely tied to existing managers of EA and NSSF assets.

The insurance space can be a bright spot for FMCs as larger insurers would like to have the FMCs for benchmarking purposes, while smaller insurers might outsource merely because of the lack of resources. However, competition is still keen from the insurance asset management companies in the country with their strong experience in dealing with insurer’s assets.

Competition for talents

Competition spreads beyond the product sphere. Since the legitimization of private funds by the AMAC in 2013, talent retention has become a more difficult challenge for asset managements. Gan notes that given the short-term mentality in China, there are even instances of portfolio managers leaving FMCs to start their own private funds after just one or two years of good performance.

Gan also quoted cultural difference as a major reason for foreign players quitting the joint ventures and leaving the country. She admits she does not have a clear suggestion for the problem, but reminds foreign managers to “recognize the differences in corporate culture inherent in China and not assume that whatever works in other parts of Asia will work in China. “ BM