China will allow local subsidiaries of foreign asset managers to launch mutual funds, according to a Chinese news report, a move that would pave the way for greater competition in the mutual fund market.
The subsidiaries, which are called wholly foreign-owned enterprises or WFOEs – a scheme Beijing introduced in 2016 – are at present restricted to selling private funds to wealthy individuals and family offices.
Only Chinese asset managers can currently launch mutual funds on the Mainland.
In a report on December 4, Shanghai-based China Business Network quoted unspecified market sources as saying that Beijing will allow foreign firms with a registered capital of at least 400 million RMB (US$56.8 million) to apply for mutual fund licences.
Spokespersons for China Securities Regulatory Commission (CSRC) and the Shanghai municipal government, which license WFOEs, did not immediately respond to questions from Asia Asset Management (AAM).
The WFOE designation allows foreign asset managers to offer investment advisory services. But in order to launch private funds, they have to also register as private fund managers with the Asset Management Association of China (AMAC). Spokespersons for the industry group did not immediately respond to questions from AAM.
There are now 22 WFOEs offering a total of 50 private funds, according to Ray Chou, a partner at US management consulting firm Oliver Wyman.
One of these companies is US asset manager Fidelity International, which has launched four private funds.
The company is “proactively preparing for the transition [into the mutual fund market] and will file its application to CSRC at an appropriate time”, a Fidelity spokesperson tells AAM.
Mr. Chou says the WFOE market is still at an early stage, with only 5 billion RMB of total assets in the 50 private funds launched thus far.
Foreign asset management firms will have multiple avenues to sell mutual funds to retail investors so “we expect foreign managers will be eager to apply for the mutual fund licences”, he tells AAM.
He expects one of the popular routes to be via their existing joint ventures with Chinese companies, especially since the CSRC has said the 49% foreign ownership limit in the joint venture asset management firms will be scrapped in April 2020.
It’s unclear whether there will be a need for a separate WFOE designation after that, although according to Mr. Chou, the Chinese market is large enough to accommodate two units of a foreign asset manager.
Foreign managers who want to launch mutual funds will likely have to put greater effort into product distribution because distribution networks are very important for mutual fund sales in the Mainland, according to Rachel Wang, director of manager research for China at fund advisory firm Morningstar.
But some WFOEs have investment teams that are very experienced in investing in the Chinese stock market so the lack of a strong distribution network is unlikely to be an issue for them.
“Investment capabilities of some managers are still competitive compared to local fund houses,” Ms. Wang tells AAM.
Figures from AMAC show that there were 127 mutual fund managers in China as of October 2019, with 13.91 trillion RMB of assets under management.