For decades Martin Flanagan, chief executive of Invesco, has shuffled between drab government buildings in Beijing and Shanghai on annual pilgrimages, urging regulators to open the market to foreign fund managers.
The trips are “packed days from breakfast through dinner — it’s really morning through night”, said Mr Flanagan, who has run the $975bn-in-assets firm since 2005.
But recently he has sensed a change in tone. Chinese authorities are now more willing to relax access to their markets, he said, spurred by a sense of urgency as they face what Larry Fink, chief executive of BlackRock, has labelled a “retirement crisis”. Beijing sees that workers trying to plan for old age have few investment options; many hoard cash or funnel money into real estate.
Fund houses, meanwhile, see a giant opportunity. Assets under management in China should grow to $9.3tn by 2023, from about $5.3tn now, according to Oliver Wyman, the research group. That would make it the world’s second largest investment market, after the US.
“They know they need to open up,” Mr Flanagan said. “This is the highest growth possibility for asset management in the world right now — there is no question it’s an incredible opportunity.”
But if the shift offers a tantalising prospect of growth for fund groups, it also raises risks they will overpay for acquisitions or bump up against powerful local regulators.
Late in 2017 China allowed foreign companies to take a 51 per cent stake in the joint ventures they operate — a threshold that will rise to full ownership in 2021. These JVs, which allow investment companies to sell mutual funds in the country, are often run in conjunction with a state-owned bank or firm. The other option is to set up a wholly foreign-owned enterprise, which is limited to unlisted investment products.
JPMorgan Asset Management, the $2tn fund group, is poised to become the first foreign asset manager to own the majority of its JV, China International Fund Management. Its partner, state-owned Shanghai International Trust, said this month that it would auction a 2 per cent stake in early June. Analysts expect JPMorgan to snap up the equity, pushing its holding to 51 per cent.
But Invesco — whose AUM will hit $1.2tn when a deal to acquire OppenheimerFunds closes this quarter — may be quicker. The US firm launched a joint venture in 1992, Invesco Great Wall, alongside three local shareholders. One is state-owned, but the other two are private companies, so gaining majority ownership will be less arduous, said Chantal Grinderslev at Z-Ben Advisors, a consultant to foreign fund groups in China. Invesco, which controls the venture despite its minority holding, has an “agreement in principle” to take majority ownership, according to Mr Flanagan, but has not yet pulled the trigger.
“Whether we’re first or second or third, it doesn’t matter,” the CEO said. “We are so far ahead of our competitors and it’s mainly because we have management control.”
Invesco ranks second after UBS in a list of foreign fund groups in China compiled by Z-Ben, which blends AUM with revenues and other factors. JPMorgan ranks third, while BlackRock is fifth.
Mr Fink told shareholders last month that he wants BlackRock to take a majority stake in its local operation. Last month the company made a marquee hire: Tang Xiadong, who spent five years in the China Securities Regulatory Commission, which oversees foreign fund managers, to run its local arm.
“Our goal is to become one of the country’s leading global asset managers,” Mr Fink said.
For giants like BlackRock, which has $6.5tn in AUM, the opening up comes at a critical moment. Slowing growth in home markets of North America and Europe has squeezed revenues as clients shift to cheaper, passive portfolios. China offers a rare growth story.
“It’s the holy grail for asset managers,” said Hugh Young, head of Asia for Standard Life Aberdeen, which has a local JV alongside a wholly owned firm. “There’s lots of people and lots of money — we are all trying to build a presence there.”
Demand for “active” mutual funds that draw higher fees than index-tracking “passive” portfolios bolsters the appeal. UBS last year estimated that fee revenue from Chinese mutual funds would grow fivefold to $42bn by 2025.
Fidelity International will build a mutual fund business when foreign fund groups are granted full ownership in 2021 after receiving a licence to launch onshore funds two years ago, said Jackson Lee, the Bermuda-based firm’s country head for China.
Despite encouraging signs from Chinese authorities, there are risks. Centralised authority gives local regulators vast and hard-to-read powers.
“In China it doesn’t matter if you own 51 per cent or 100 per cent — if you upset the Chinese authorities it can be gone,” said one Asia-based executive of a global fund manager.
In that context, the first to gain majority ownership may pay a price from which others will benefit.
“There’s a lot of pressure,” said Ms Grinderslev of Z-Ben. “If the first through the wall gets bloodied, then the blood splatter on those that follow could be difficult to ignore.”
Additional reporting by Eva Szalay in London