“If it’s only a foreign wholly-owned company, I believe it has a relatively low chance of success in China at this stage,” Jiang told our sister publication Fund Selector Asia.
“The China market is very different from other developed markets in the US and Europe, hence an approach that is successful in the developed countries might not be applied to China,” he continued.
A joint venture (JV) with a Chinese partner can bring out the best side of each firm, he added.
Jiang led the set-up of CCB Principal Asset Management, a mutual fund joint-venture with Iowa-based Principal Financial Group, in 2005. He remained chairman of the firm until 2014 when he relocated to Hong Kong to assume his role at CCB (Asia).
"Among the fund houses I have been in touch with for setup of a JV asset management company, majority of those big names are too confident."
Challenges
The first and most conspicuous challenge WFOEs face is distribution. “They have to rely on third parties,” Jiang said. “Although some fund houses might be very big globally outside China, the Chinese [investors] do not recognize them. The brand does not bring much value in the mainland.”
Second, their ways of investment might not work in China. “Their investment philosophy, stock picking ideas and ways of doing research might be very good, but they might not be applicable to China,” Jiang explained.
“The China A-share market has its special characteristics,” he said. In order to be successful in China, fund managers must take into account the market’s volatility, the interpretation and impact of government policies and sometimes even market rumours, he argued.
Chinese advantages
By contrast, a Chinese bank has various advantages, he noted. The main one is brand recognition among their individual and corporate customers.
Moreover, commercial banks have close relationships with, and a high level of understanding of listed companies, he noted.
“It is very helpful to provide insight when the fund manager decides which listed stock to invest in.”
Cultural differences
The challenge that may be the most difficult to overcome is the cultural difference, Jiang said.
“Among the fund houses I have been in touch with for setup of a JV asset management company, majority of those big names are too confident,” he said. “They value a lot about their brands.”
“If they form a JV, they must lead the firm. Even though they cannot own the majority stake in the company due to regulation, they want to lead the operations,” he said. “That’s not what we want.”
Jiang said that in order to forestall such demands from a foreign partner and to retain a high level of influence, CCB adopted a rule when planning a joint venture: it would not pick one of the top 10 US fund companies.
As of February 2017, there were 109 mutual fund houses in onshore China, 44 of them joint-ventures with foreign firms, according to Asset Management Association of China’s data.
Chinese regulations limit a foreign firm’s stake in a JV to 49%. Since last year however, WFOEs are allowed to launch investment products to qualified investors, including institutional and high net worth clients. Fidelity, which does not own a JV in China at the moment, is expected to become the first foreign fund manager to do so.
“One possible outcome [for WFOEs] is that they can set foot in China in the next three to five years, but the pace of development will be slower than their expectations,” Jiang said. “The issued products might only have market average performance, but its track record is not spectacular enough to attract mainland investors.”
