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China alliance places JP Morgan in advisory role

The days when mainland investors hid their money in mattresses or squirrelled it away in low interest-bearing bank accounts is coming to an end as financial reforms pave the way for more aggressive investment products.

If all goes as planned, the first group of open-ended mutual funds could be on offer by year-end, says Bonny Landers, vice-president, Regional Business Executive for North Asia, JP Morgan Investor Services.

The funds are limited to domestic shares, but they represent a breakthrough in winning new investors.

With more than US$1 trillion (HK$7.78 trillion) in domestic savings and few products to satiate the population's growing appetite, the mainland is one of the last great frontiers for investment service providers.

'We're talking about changing the savings habits of this country in dramatic ways in a short period of time,' Ms Landers said. Mutual funds, she said, could 'have a huge effect on securities markets, capital markets and funds flow'.

At present, investment is limited to the domestic stock market, bank savings accounts, and closed-end mutual funds which have fixed deposit schedules and less aggressive discretionary management than international mutual funds. Only the government and government-owned banks are officially permitted to invest overseas.

In February, JP Morgan formed a strategic alliance with the China Construction Bank and the Bank of Communications to provide expertise and training on custodianship issues. The agreements are in response to pressure from the central government to upgrade standards to international levels in preparation for large fund flows from domestic savers.

'They don't have the expertise for a large mutual fund database,' Ms Landers said. 'So the government has asked banks willing to provide these services to sign up with a foreign expert.'

JPMorgan is keen to play an advisory role, and has no interest in developing a custodianship business in the mainland due to the high start-up costs and dominant position occupied by local banks, according to Ms Landers.

Instead, JP Morgan is looking down the road, perhaps three to five years, when the renminbi is freely convertible and Chinese investors can choose from offshore mutual funds.

'We are keen to expand our custody services when Chinese investors are allowed to invest overseas,' she said.

Foreign custody providers have never played a major role in the mainland, and they are not likely to compete with the big banks in the near future.

'Custody is a game of economies of scale,' Ms Landers said. 'Our entire sector has all kinds of interesting developments for the pooling of funds, and if there's fund management growth, custody services will grow too.'

Looking ahead, Ms Landers forecasts huge interest in mutual fund investment.

'What's changing, and what we are all excited about, is the speed with which China is opening up and the reforms they are instituting,' she said. 'The internal landscape is changing, and the government has agreed there needs to be more options.'

According to Ms Landers, while progress has been made, it will take years before the investment infrastructure is up to international standards.

On the fund management side, JF Funds, a subsidiary of JP Morgan, has signed an agreement with Hua An Fund Managers, a local financial management company, to provide joint management services. The venture faces regulatory hurdles, but there is optimism the deal will go through, resulting in the first foreign fund managers to operate on mainland turf.

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