Exploring New Horizons - International Strategies for Chinese Asset Managers
13 September 2012
This article will begin by exploring Chinese asset managers' Western expansion plans. The second article will look at Chinese financial markets from the point of view of European asset managers. The series will conclude by highlighting their common ground and the scope for cooperation. With the maturing of Chinese financial markets, Chinese asset managers are increasingly looking to expand overseas. This article looks at their expansion strategies into Hong Kong SAR and beyond, and examines the implications of the complex regulatory restrictions arising from the Dodd-Frank Act and AIFMD.
Chinese Asset Managers' Expansion Strategy
Hong Kong SAR as a first stepping-stone
While Chinese asset management firms with licences to operate overseas are not required to set up shop in Hong Kong SAR, the city is a natural starting point for their international expansion. This is because Hong Kong SAR investors have generally shown more interest in China-related investment opportunities compared to American or European investors. Due to Hong Kong SAR's close proximity with China, its cultural similarities, and its dual language English and Chinese capability, Hong Kong SAR provides a solid platform for international expansion. This approach is likely to continue, as Chinese asset managers are able to establish their brand and build up a recognisable track record before they move to compete internationally.
More importantly, since China’s first offshore RMB experiment in Hong Kong SAR in 2004, Hong Kong has grown to be the largest offshore RMB centre outside Mainland China, with 92% of total RMB settlement volume in 2011 occurring via Hong Kong SAR. With the further internationalisation of the RMB, Hong Kong SAR is set to benefit from the support of greater liberalisation policies.
In the past year, additional measures have been introduced to encourage the internationalisation of the RMB and Chinese asset managers’ expansion into Hong Kong SAR. The introduction of the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme establishes a recycling mechanism for RMB in Hong Kong SAR and creates a channel for offshore RMB to flow back into mainland capital markets. Under the RQFII scheme, Hong Kong SAR subsidiaries of qualified mainland asset management and securities firms are able to raise offshore RMB in Hong Kong SAR to invest in mainland securities. These investments in onshore RMB bonds generally offer better yields for Hong Kong SAR investors over and above the expected RMB appreciation. Chinese asset managers can use their expertise in the PRC domestic markets to deliver returns to foreign investors, and also enhance their reputation and branding globally.
Although the RQFII scheme was widely and keenly anticipated, initial sales fell below expectations because of low return yields, high investment costs and weak market sentiment. However, there have been recent signs of improvement as a result of the latest rate cuts by Beijing.
Although most of these Chinese asset managers have set up in Hong Kong SAR, their long term strategy is to expand their distribution networks overseas. In order to be global players, Chinese asset managers will need to develop their reputation, and launch products that are generally acceptable to investors in the rest of the global market. The biggest challenge is distribution.
Looking at the European angle, greater collaboration with European asset managers or European banks may allow Chinese asset managers to acquire complex European product know-how and develop investment strategies that could prove useful after further liberalisation. Collaboration will need to be approached with care though, as it is seen as often expensive and inflexible.
The recent European crisis presents both opportunities and risks to Chinese asset managers. While the crisis may deter the risk-averse, the more aggressive asset managers view the Eurozone crisis as an opportunity to foster increased investment into Europe from emerging markets, particularly China.
In addition to having a robust European strategy, Chinese asset managers moving overseas must also take into account a range of other regulatory regimes and environments. The recent Dodd-Frank Act and the Alternative Investment Fund Managers Directive (AIFMD) have implications beyond their respective geographical boundaries.
In general, both the Dodd-Frank Act and the AIFMD will lead to uncertainty and cost inflation. Although market uncertainty may be hard to measure, these regulations will undoubtedly impose quantifiable costs on Chinese asset managers. From compliance requirements to necessary investments to attract and retain skilled employees, install suitable technology, etc., such costs are sure to push up asset managers' expenses. Robust corporate governance processes and compliant programmes will be required to meet the higher expectations of regulators, including the strong push for greater transparency and accountability. However, while compliance with these regulations may increase costs, this is likely to strengthen the operations of these Chinese asset managers, which will assist them to compete more successfully internationally.
Chinese asset managers are looking West, and their initial launch pad is naturally Hong Kong SAR, a city that has positioned itself to be the premier offshore RMB centre and a key testing ground for the internationalisation of the RMB. The recently introduced RQFII scheme further allows Chinese asset managers to build their brand and reputation before they move to compete internationally. The financial crisis in Europe has driven investors to diversify their investments into China, and this has given Chinese asset managers a chance to develop a global network and acquire valuable know-how through collaboration with their Western counterparts. The move West will expose them to international regulatory standards and practices, such as those imposed by the Dodd-Frank Act and the AIFMD. Chinese asset managers should seize this opportunity to develop and strengthen their systems and operations to match those of their international competitors so that they are well primed to become global players in the future.
Read the second article in our series of three articles looking at the relationship between the Western and Asian asset management industries - Continental Drift - Asian Strategies for Western Asset Managers: FAQ.