Global Asset Managers Chart a Course for China

China’s changing stance on wealth-management regulation could open the door for more asset managers to enter the country’s domestic market. Up for grabs could be roughly $700 billion of potential assets under management (AUM) of the “the core onshore” market—and a $7 billion revenue opportunity for foreign managers.

“We see an opening up of a rapidly growing asset management market in China that will allow foreign firms greater ownership and participation in growth over time,” says Richard Xu, equity analyst covering China financials. “This could present significant opportunities, as local Chinese firms harness the expertise, and in some cases the brand, of foreign and leading global asset managers.”

In the near term, foreign asset managers will see the most success through joint ventures with local firms, which maintain operational control and provide local market expertise, relationships and distribution. Longer term, as China raises the foreign ownership cap for such joint ventures, greater control or even a wholly owned asset management firm may prove a more attractive route to success for international asset management companies.

China Third-party Asset Management Products to Grow to $7 Trillion
(Onshore "core", Third-party Managed AUM in China, 2010-2023F, USD Tn)

Over the past five years, China’s wealth-management marketplace has grown by 22% in AUM to about $11 trillion. A doubling in household financial assets, the recent rebound in discretionary income growth and still-high savings rates will likely bolster that figure.

In 2018, China implemented new asset-management rules to create greater economic stability. Until recently, many Chinese invested through a trust fund or a wealth-management product at a bank that promised investors a set return.

“While the promise of an ‘absolute return’ has been a major factor behind the growth of China’s wealth-management industry, these products—which comprise 40% of the market—artificially restricted flows into mutual funds by advertising equity-like returns, but without the implied risk,” says Xu.

The new asset-management rules will drive a structural shift from implicitly guaranteed bank products to equity mutual funds. The move to traditional net-asset-value-based equity funds will not happen overnight, but the shift is expected to conclude by year-end 2020.

The move away from implicit “guaranteed” investments toward NAV-based equity funds will likely create a natural client base for high-quality asset managers who can differentiate their performance from the pack and demonstrate expertise in asset allocation and risk management. 

According to Xu and Sharma, international companies looking to capture share in Asia will face stiff competition from local incumbents. However, they believe the opportunity warrants the risk, noting that foreign asset managers will have four entry points into the Chinese market, which they estimate comprises roughly $3.8 trillion onshore assets and $1.5 trillion offshore assets.

Offshore "fly-in" approaches could provide the path of least resistance, but international products may have limited allocations within clients’ portfolios. The real opportunity will lie with localized presence and products—assuming firms can get a license to tap into the largest pool of assets.

“Although this entry method requires the most upfront investment and the longest path to profitability, it also provides access to the largest revenue pool opportunity, full operational control, a more flexible investment scope, and a foothold to build local expertise and relationships,” says Sharma.

China’s cleanup efforts will allow Chinese banks to retain fixed income and privately raised equity products in-house but will require outsourcing of publicly raised equity funds, either through a newly created bank subsidiary or third-party manager. This rule will also provide opportunities for third-party management to take share.

“We believe demand will be greater for publicly raised equity products over in-house privately raised, and see a potential $500 billion AUM opportunity for third-party managers to capture equity flows from banks,” says equity analyst Anil Sharma. “We also expect recent policies to lead to more rational growth in money market funds, high-yield saving-style insurance products, and highly leveraged private funds, driving $750 billion to $900 billion of inflows for both China A-shares and the Hong Kong market over the next two years.”

According to Xu and Sharma, international companies looking to capture share in Asia will face stiff competition from local incumbents. However, they believe the opportunity warrants the risk, noting that foreign asset managers will have four entry points into the Chinese market, which they estimate comprises roughly $3.8 trillion onshore assets and $1.5 trillion offshore assets.

Offshore "fly-in" approaches could provide the path of least resistance, but international products may have limited allocations within clients’ portfolios. The real opportunity will lie with localized presence and products—assuming firms can get a license to tap into the largest pool of assets.

“Although this entry method requires the most upfront investment and the longest path to profitability, it also provides access to the largest revenue pool opportunity, full operational control, a more flexible investment scope, and a foothold to build local expertise and relationships,” says Sharma.

For more Morgan Stanley Research on the latest trends and outlook for the financial sector ask your Morgan Stanley representative or Financial Advisor for the BluePaper, “Searching for Growth in an Age of Disruption” (Mar 14, 2019), a collaborative report between Morgan Stanley Research and Oliver Wyman. Plus, more Ideas from Morgan Stanley thought leaders.