Freelance journalist Alastair O’Dell, on behalf of Funds Europe, interviewed four key stakeholders of financial institutions operating in China who have in-depth knowledge of the strategies that asset managers need to access markets and effectively trade and invest in China.
Opening up China’s economy
Interest from international asset managers in setting up funds in China has “been in place for many years now,” thinks Clive Bellows, Head of Global Funds Services, EMEA, at Northern Trust. This is due to the economic growth China has experienced since 2000, but what is happening in China mirrors rising global interest in equities and alternative investments.
The rebalancing of China’s economy from “an export and investment-driven economy to a domestic consumption and innovation-driven economy,” is exciting investors, says Richard Pan, CIO of China Asset Management Company (China AMC) and makes China attractive to international asset managers.
With quota limits removed, cross border capital flow controls relaxed and just a tax commitment letter needed for repatriation, the opportunity for international investment has grown, explained Angela Chang, Head of Global Custody Service Division at Chinese multinational bank ICBC.
“The relaxing of QFII requirements means more foreign institutions can apply for a QFII licence,” Chang says.
The transformation of China’s economy is illustrated by high online sales and mobile payment rates. Younger consumers are getting richer and spending more, often on luxury goods, and this trend is set to continue.
China is innovating in renewable energy and electric vehicle production, industries that will power global economic growth for the next few decades. This makes these products accessible for global consumers and attractive to foreign asset managers.
Pan expects the solar energy supply chain to provide international investors with opportunities now and in the long term. China makes 80% of the world’s solar panels, and by developing and using cutting-edge technologies, has cut production costs by 90% since 2010.
China and international investors in-sync
The strategy from the Chinese government to attract foreign investors is supported by prioritising investment strategies through two policies that impact asset management strategies. Firstly, by balancing development, fair opportunities and common prosperity; and secondly, through responsible investment that focuses on maximising stakeholder and shareholder value.
Environment, social and governance (ESG) investments are growing in China, as in other developed global economies, and represent another shared priority for China and global investors.
They are “at the heart of our investment value,” said China AMC’s Pan. “Right now we are pioneers in the ESG space in China, but we believe over the years, ESG investment will become the mainstream investment in China.”
A two-way flow
As China’s asset management industry opens up, it’s not just international investors reacting. It’s a two-way flow. Global investors are looking to invest in China and Chinese investors want access to global markets. For this flow to work and for Chinese firms to get exposure to global markets, foreign firms must be able to work within China.
“International asset managers find entering an unfamiliar Chinese market and having to meet both local and global requirements challenging,” said Dan Wang, WFOE Service Manager, Custody Department at China Merchant Securities.
The process of setting up trading operations in China is complex and requires local knowledge, so it’s vital to work with domestic Chinese providers, “if you don’t have a presence on the ground there’s no point trying to do business,” Bellows says.
Local service providers help fund managers get operations started in China. Chang said it’s best to appoint several local service providers to cover different areas to help foreign investors invest in China’s capital markets. Local brokers can also help execute trades at the Stock Exchange.
“The experience and comprehensive investment service capabilities of local custodians are very important for foreign investors,” Chang said.
How to enter China’s capital markets
There are four main channels for foreign investors to enter Chinese capital markets; QFII, CIBM direct investments, Stock Connect and Bond Connect.
The first two use onshore arrangements and the latter two are offshore. QFII schemes need a licence application, CIBM direct investment and Bond Connect just need filing with the People’s Bank of China, the central bank and regulator of the bond market. The Northbound Stock Connect has a daily quota limit of RMB52 billion for foreign investors, but the other three have no quota limits.
QFII has the most comprehensive investment scope for international investors, covering many assets, whilst Stock and Bond Connect have a limited scope and trading costs are higher.
The two main business development models used by international asset managers in China’s capital markets are private fund companies like WFOE and mutual fund companies.
WFOE was launched in 2017 and now has a scale of over RMB20 billion, covering various shareholder funds and assets. There are four requirements for setting up a WFOE; they must be set up in China, the shareholder must sign a memorandum of understanding for Securities Regulatory Cooperation with the China Securities Regulatory Commission, the shareholder’s financial institution must be approved by its own financial regulator and must not have broken any financial rules in the last three years.
For mutual funds, effective April 2020, foreign management companies either acquire ownership from existing Sino-foreign jointly owned fund companies’ or set up a new foreign-owned fund company.
To set up, companies have to register with the local government and Asset Management Association of China (AMAC). After filing with AMAC, they can start investing in Chinese markets.
Examples of best practice
Northern Trust has a strong presence in Hong Kong and Beijing. “Working on the ground in China and then leveraging our global operating model,” enables the company to introduce global market functions to China, Bellows says.
This approach has helped Northern Trust learn how to operate in China and provide support to other institutional investors looking to set up China-focused funds around legal issues, what funds to set up, where to locate, how to access stocks and trade in the Chinese market.
China Merchant Securities is the first service provider in China to work with WFOE and supports foreign managers by setting up dedicated sub-teams to help managers control costs and manage operational matters.
“In general, the private fund license is much easier to obtain than mutual funds, so most institutions launch private fund business first and then transfer to mutual funds,” said Wang.
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