Ongoing challenges hinder growth of foreign fund management firms in China

Regulatory constraints and limited distribution channels cause market share and assets under managementto remain stagnant.

Foreign fund management companies operating in China continue to be hindered by ongoing challenges. Regulatory constraints and limited distribution channels are restricting their ability to grow their market share and assets under management (AUM). Increased competition from domestic companies is also adding another layer of challenge for the foreign managers. These findings were revealed in the third PwC Foreign Fund Management Companies in China survey report.

“When we did the first survey back in 2007, there was enormous optimism about the future prospects for the fund management industry in China. In the eyes of some fund managers, that feeling has since evaporated somewhat. The regulatory environment remains tough. The distribution network is still dominated by the four major banks. Not to mention, there’re now more Chinese players in the market. So, it doesn’t come as a surprise that foreign fund houses find it challenging to make an impact in China,” says Robert Grome, PwC Asset Management Leader for Asia Pacific.

Topmost on the minds of most foreign fund managers is to grow their AUM, which have remained unchanged over the last two years. Compared to the domestic companies’ market share of 53% with RMB 1,321 billion of AUM in 2010, the foreign players command a respectable 47% (from 45% in 2008) with RMB 1,176 billion. Going forward, however, the respondents expect to see a 60% growth in AUM by 2014.

For the first time since PwC conducted the biennial survey, the 30 foreign fund management companies that took part this year identified human resource management as a major concern. The industry has seen an exodus of CEOs and star fund managers who would much prefer a position in unregulated private fund houses where they may be granted a shareholding in the company. The skill shortages across the sector are becoming more acute with the expansion in product offerings and diversification.

Despite all the challenges though, the foreign fund management companies operating in China are far from calling it quits. All the respondents remain resolute in their commitment and confidence in the Chinese market. So much so, they’re projecting a higher revenue growth in the next three years than at present. That optimism stems from the recent loosening of the approval process for new funds and the expected opening up of more distribution channels. 

“Li Keqiang’s [Vice-Premier of China] recent announcement of the launch of the RQFII [RMB Qualified Foreign Institutional Investors] programme has had everybody excited. That and opportunities in QFII and QDII, not to mention the gradual internationalisation of the renminbi all point to good times ahead. Yes, there may, and will be, bumps ahead. But there’s no doubt China is still the engine of global economic growth especially with the current crises gripping Europe and the US. This is clearly evidenced by the respondents’ optimistic growth projections for China in the next three years. So, most foreign fund houses would want to stick it out for now,” says Keith Lie, PwC Asset Management Partner for Hong Kong.

The continuing growth in product diversification and the introduction of cross-border activity especially between China and Hong Kong are also important recent developments in the internationalisation of China’s funds industry. It is this huge upside potential that will draw a significant number of new foreign participants into the marketplace.