What every asset manager needs to know before launching in China

This is a FN Custom Studio article first published by Financial News on 21 June 2021.

Chinese financial markets have become much more accessible for international investors in recent years as authorities have sought to attract foreign inflows. However, in many respects, the world’s second-largest national economy remains an emerging market. So, what do asset managers need to know before launching in China?

The opening of the Chinese market to international investors has provided one of the most exciting opportunities for asset managers in recent years. But it’s also been an educational experience as Chinese authorities have laboured to put the regulatory infrastructure in place to cope with demand.

Given the size and importance of the Chinese economy, many rushed to invest in some of the world’s biggest growth stories.

However, expectations have had to be tempered as international investors adapt to a different business culture and an evolving regulatory landscape.

“There are a number of different aspects to China today, and they continue to evolve,” said Gary O’Brien, head of broker segment strategy at BNP Paribas Securities Services. “It is certainly not a one-size-fits-all model, so it is really important to have an understanding and clarity of the different schemes [and] the different models.”

From onshore to offshore

While there was an initial onus on international investors to trade, hold and settle securities onshore via local joint ventures, the arrival of the Connect schemes have made trading much simpler, said O’Brien.

“The first scheme was the Shanghai-Hong Kong Stock Connect that expanded to include Shenzhen as well,” he explained, noting that it allowed international investors to buy and sell shares listed on the Shanghai and Shenzhen stock exchanges via Hong Kong. This enabled foreign asset managers to access Chinese shares through traditional custody structures and has recently been replicated for bonds with the Bond Connect scheme.

“What we see in all of these schemes is that they continue to evolve and change in quite an agile way, almost year-to-year,” he added. “So, it is fair to say that we need to keep watching what is happening, because what may have been your decision on the approach to use with China in 2019 and 2020 may not be the same answer in 2021 and looking forward toward 2025.”

Reviewing your local settlement and clearing processes is likely to be an ongoing process when it comes to China, panellists for FN Custom Studio’s “Unlocking China’s potential – no longer ‘why’ but ‘how’?” webinar observed, as the regulatory landscape continues to change.

“The reality is that what has succeeded for you elsewhere may not necessarily succeed in China,” said BNP Paribas’ O’Brien.

“If you take the China-Hong Kong Stock Connect, for example, the end-of-day trading is essentially four hours before the window [closes]. So, you have got four hours to confirm your trade, send it to your custodian, and get it in the market, whereas [what] we are used to in the US [is] one day,” he said. “With that in mind, a lot of people will have to start to rethink that strategy if they increase their weighting toward China.”

London calling

As the regulatory environment has continued to evolve, other services have also emerged, such as the Shanghai-London Stock Connect: a collaboration with the London Stock Exchange that has enabled even more international investors to access the Chinese market.

“It is the first time that international investors can access Chinese instruments outside of China using international trading and practices,” said Sabina Liu, head of APAC business development at the London Stock Exchange. “It is also the first time [that] foreign companies can list in mainland China and the first time that Shanghai Stock Exchange-listed companies can raise capital abroad.”

She continued: “Since 2019, we have four companies coming to the market: Huatai Securities, China Pacific Insurance Group, Yangtze Power and also SDIC. In total, they raised more than $5bn in the London market.”

While institutional investors have traditionally driven the London market in general, Liu said there had been a growing interest from retail investors from Asia, particularly due to working from home and high usage of mobile phones during the Covid-19 pandemic and the development of retail trading technology.

 “The thing with London is, because of the time zone, we have a good mix of different types of investors from different regions,” she said. “That means people trading different directions, short-term, medium-term, so it makes the liquidity very balanced.”

The developing opportunity for asset managers

It’s not just an opportunity for international investors: asset managers are also taking advantage of the opening-up to offer their products to onshore investors, too.

“Right now, we have a business that is able to manufacture private funds for domestic investors,” said Senan Yuen, head of investment, China at Fidelity International. “Each private fund can have no more than 200 investors, but we are more interested in the mutual fund license because you can manufacture retail funds. And that is the endgame.”

Yuen said offering mutual funds to Chinese investors is part of its longer-term, multi-pronged approach to China and providing both inbound and outbound investment services.

“We have been investing in the market since 2004,” he said. “So, although it feels like we are just submitting the application now, we have that patience to wait out and go through the market and engage with the parties to get through the endgame.”

Hedging their bets

In the asset management space, BNP Paribas Securities Services’ O’Brien said investors have been “hedging their bets a little bit” by setting up under different schemes and models. This approach ensures that if the regulatory environment does change, they can shift more easily.

“I think that it is fair to say that, at times, some of the changes in the market came through relatively quickly, and people have to react quite quickly, or things went live, and people needed to take time,” he explained.

“[But] I think it is fair to say that what we have seen nowadays is there is a lot more openness on where those journeys are going and what are the next directions, either through consultation process or through kind of commentary in conferences or in bilateral meetings.”

Whatever method you use to access the Chinese market, finished O’Brien, staying close to regulators and other parts of the market infrastructure – such as exchanges – will help asset managers keep abreast of ongoing developments in the rapidly growing and evolving Chinese market.