China set for growth in fund management
China's fund management industry is poised for explosive growth but foreign fund managers are unlikely to see joint-venture profits for the next decade, according to research from Cerulli Associates.
The mainland's collective scheme market place could be worth US$350 billion by 2030, Cerulli said. Coupled with pension reform, which is expected to generate as much as US$1.8 trillion by the same year, China's fund management industry could supersede the rest of Asia and rival Japan's in size.
More than US$10 billion is held in funds in China, with closed-end funds available since 1997 and open-ended vehicles launched late last year. In July, the government allowed foreign fund managers to enter the market through joint ventures with domestic firms.
'[We] believe foreign fund managers will fail to see profits from such joint ventures until 2011 at the earliest, as the cost of market entry remains high,' Cerulli said.
'In addition, we have reminded our clients about the chequered history of all cross-border joint ventures in fund management, more than half of which are now defunct.'
Nineteen asset management firms have been set up in China since March 1998 with 64 mutual funds (53 closed and 11 open-ended) as of last month.
In Hong Kong, investors are expected to continue to put money into mutual funds at a compound annual growth rate of 9 per cent, taking the estimated US$17.1 billion invested to US$24.4 billion by 2006.
'[This growth by 2006 will make] Hong Kong the fifth-largest asset management market-place in the region after Taiwan, Korea, China and India. Hong Kong is already the regional market-place most accessible to global asset management firms, and it is likely to remain so for the foreseeable future,' Cerulli said.
Looking further afield, Cerulli estimates that banks will be the main fund distributors in the leading markets of Hong Kong, Korea, Taiwan and Singapore - accounting for 51 per cent of assets under management by 2006 from 39 per cent last year. Banks in the region at present have US$45.4 billion in assets under management, a figure expected to grow at a compound annual rate of 25 per cent to reach US$131 billion by 2006.
Banks will also be the main drivers of distribution in China due to their extensive sales infrastructure, which will extend open-ended funds' share of the market from 14 per cent to an estimated 55 per cent by 2006.
According to a recent survey from the Hong Kong Investment Funds Association (HKIFA), more than half (51 per cent) of SAR retail investors bought funds from their primary banks - tying in with a strategy among local banks to boost their fee-based income due to a margin squeeze caused by interest-rate deregulation last July. Insurance companies at present account for 44 per cent of fund sales.
'Banks are not only an important sales channel, but are also perceived as an important source for information and advice,' said Sally Wong, executive director of the HKIFA.
Cerulli said a bank's reputation was the most significant factor affecting its role as a fund distributor. Banks cited fund performance and a willingness to provide follow-up support as the two most important criteria they looked for in asset management firms.
