20 August 2018

Large banks to keep control of China JVs

Published by Fund Selector Asia – 20th Aug 2018

Despite a relaxation of foreign ownership rules, Chinese partners are expected to retain the majority stake in joint ventures because China’s asset management business is lucrative, said Ye Kangting, analyst at Cerulli Associates in Singapore.

In April, the Chinese authorities announced that foreign players could apply for a 51% majority ownership in a Chinese fund management firm. Before the relaxation, foreign firms could only own up to 49%.

However, Ye said the foreign side of a joint venture is unlikely to convince the Chinese partner to give up majority ownership.

“With a stronger Chinese partner, it is difficult for the foreign firm to negotiate.

“In fact, the asset management business in China is still very lucrative. Chinese partners, especially those with a strong financial background and presence, are unlikely to give up their control in the joint venture.”

She believes it will be easier for foreign firms who have a partner that is not a mutual fund manager and not a bank, but one that operates as a trust business. She cited JP Morgan Asset Management as an example.

JP Morgan AM’s joint venture, China International Fund Management was established in 2004 with trust company Shanghai International Trust & Investment Corporation. In May, the US bank was the first foreign entity to express interest in raising their stake to majority ownership.

“The main reason for that is their Chinese partner is a trust company, which tends to have lower negotiating power than the banks,” she added.

Ye said the regulator is expected to release further guidelines on the joint venture rules in mid-2018 but it is yet to announce any details after the brief announcement in April.

Previously, commenting on China’s new joint venture rules, Shanghai-based consultancy firm Z-Ben Advisors said in a note that foreign asset managers will face a major challenge trying to get 51% ownership.

“The only [Chinese partner] these global managers would consider would have to be large, have achieved real scalability and be profitable. In reality, no such targets exist or [there are none] willing to sell,” the consultancy firm noted.

Going offshore

Joint ventures can serve both sides of the partnership as cross-border activity heats up. Foreign firms continue to set up onshore in China with different schemes while the plans of domestic Chinese firms increasingly include distribution of funds overseas.

The latest offshore launch is ICBC Credit Suisse with a Ucits passive product for sale in Canada. The product, ICBCCS Wisdomtree S&P China 500 Ucits ETF, was made available for retail and institutional investors in Toronto last week.

The Luxembourg-domiciled fund is the only offshore-regulated fund managed by the firm. The product is also available to European investors.

The joint venture was formed in 2005 between the world’s largest bank by assets, Industrial and Commerce Bank of China and Swiss partner Credit Suisse.

The Chinese state-owned bank currently owns 80% while Credit Suisse holds the rest. The firm ranks 10th domestically in terms of AUM (excluding money-market funds).

In addition to ICBC Credit Suisse, Penghua, Fullgoal, Bank of Communication and China AMC have funds registered outside of the mainland and Hong Kong, according to FE Analytics.

Commenting on Chinese joint ventures going offshore, Ye believes it will be a slow development.

“The market in China is not very crowded and still provides opportunities to the fund managers. Although some of them may have plans to go offshore, their intention is not strong,” she explained.