now loading...
Wealth Asia Connect Middle East Treasury & Capital Markets Europe ESG Forum TechTalk
Here come china’s money managers
Why going global is all about the domestic agenda
Daniel Yu and Derrick Hong 17 Nov 2017
It was standing-room only at the Level 5 ballroom of the Island Shangri-La in Hong Kong as Tan Jiong, senior executive vice-president of ICBC, China’s biggest bank, unveiled in October the new form factor of its offshore asset management arm, renamed ICBC Asset Management (Global), previously known as ICBC (Asia) Investment Management Co. In attendance were the Asia heads of some of the world’s largest asset managers: Amundi, Blackrock, Blackstone, Goldman Sachs and J.P.Morgan, as well as the rising Chinese asset managers such as China Asset Management Co, CSOP Asset Management and Ping An of China Asset Management, who were all there to sign a strategic cooperation agreement with the bank.
 
Whereas the US and European-based asset managers found little need to do so as their business grew globally over time, Chinese financial institutions seem inclined to announce their arrival on the global stage. Hence, as not to put too fine a point to it, the change from Asia to global. The difference in approach reflects what may be a fundamental shift in the world of investing: the rise of the money managers from China.
 
The gush of liquidity out of China in search of investable assets is well chronicled and has been unprecedented over the recent past. The latest credit report from Asifma reiterates it. The regional trade association that promotes the development of capital markets observes that US dollar debt issuance in Asia ex-Japan and Australia/New Zealand totalling US$230.8 billion as of the third quarter of 2017 has surpassed the US$204.7 billion for the whole of 2016.
 
Robust appetite in China for bonds, especially for Chinese credits, underpins this growth, it says. “This has driven issuance up for three of the past four summers, which seems to be a long-term shift, and shows the emerging dominance of Chinese issuers and investors in the market.”
 
As China integrates its financial markets with the rest of the world, the roots of going global among Chinese asset managers are ironically far more domestic in origin: to position themselves to win a share to manage the growing pool of institutional savings in China looking for investable assets.
 
Beyond the developed markets of the United States and Europe, China is the big bonanza for asset managers in the next decade. The numbers are tantalizing. Mutual funds are expected to top US$3.6 trillion by 2020, according to a study by Oliver Wyman, a New York based consulting firm. Another consulting firm based in Shanghai, Z-Ben Advisors, estimates China’s total institutional assets to reach US$10.8 trillion by 2021, having grown by 500% from US$1.1 trillion to US$7.1 trillion between 2005 and 2015. ICBC’s Tan says it plainly when he addressed the assembled guests at the launch: “China’s opportunity is a global opportunity.”
 
Indeed, as Chinese asset managers position their activity globally, they are in fact playing to the domestic audience. Their ability to project their international investing capability to the growing number of Chinese investors looking beyond the domestic market is a critical differentiating point. Global fund managers, who signed cooperation agreements, are more than happy to collaborate as they see the partnership with the likes of ICBC as yet another entry point to become a meaningful participant in what is undoubtedly the next big thing in the asset management industry.
 
“ICBC and JPMorgan have a long history of working together, especially over the past several years,” shares Michael Falcon, CEO of the region for JPMorgan Asset Management, who also spoke at the October gathering. “We have many interactions and through these interactions we have increased our mutual understanding. We remain and are committed to leverage our global platform to support ICBC Asset Management in your journey to internationalization.”
 
ICBC Asset Management (Global), says Tan, expects to close 2017 with total assets under management of HK$100 billion (US$12.9 billion). He hopes to triple this to HK$300 billion in three years. This is the sort of growth trajectory that all asset managers, Chinese and foreign, are keen to capture, providing business opportunities that have until three years ago been non-existent.
 
As China’s 19th Party Congress came to a close in October and with President Xi Jinping looking to accelerate his centrepiece programme called One Belt, One Road, going global is looking ever more firmly a policy priority. Chinese financial institutions know that in order to maintain their relevance especially to their clients, being able to show international connections and capability are second to none.
 
Industry make-up
Similar to the domestic market, there are also two major types of active Chinese asset managers in the offshore market. The first is what is regarded to be real asset management companies (AMCs) in the Chinese definition, which are the likes of the traditional big four state-owned asset managers, originally set up to tackle the non-performing assets of the big four banks in China following the Asian financial crisis. These are Huarong, Cinda, Great Wall and Orient.
 
Their business model is to buy bad assets, restructure them and dispose these at a profit. Currently, the big four asset managers have all set up their Hong Kong arms to help manage Chinese SOEs’ offshore assets. Their business model has evolved over time and now they are active participants in equity and fixed income issues by Chinese entities. They meet their financing objectives by themselves tapping the capital market.
 
China Huarong AMC, for example, issued in April 2017 a US$3.4 billion dual-tranche senior unsecure bond. With liquidity in hand, The Asset understands that AMCs such as Huarong, have the option to park some of their available funds into Chinese new issues, becoming one of the most sought-after investors in the G3 bond market, often adding to the huge demand that has resulted in the tightening of pricing on these new issues.
 
Traditional international fixed income investors such as the likes of Pimco, Fidelity, Blackrock and State Street often are perplexed at how expensive Asian US dollar bonds are. But holding back for a market correction has proved to be a losing proposition. As they re-enter the market, however, they only force bond prices higher and yields to drop further to historic lows.
 
Such was the situation recently when international investors kept their powder dry expecting for another sovereign downgrade for China and/or perhaps for the property market to implode. “International investors were very negative in the middle of last year and under-allocating themselves,” recalls the head of high yield at a global bank. When the market was not correcting and the China downgrade by S&P had little impact on prices, including the unrated benchmark US$2 billion offering by China’s Ministry of Finance, they realized the market liquidity and demand for Chinese credits are unlikely to go away.
 
The second type of asset managers consists of fund managers the likes of China AMC, CSOP Asset Management and E Fund Management. Both have set up offices in Hong Kong and are able to offer fund products to their retail and institutional clients. These managers are regarded as independent entities not linked to banks or insurance companies.
 
A third segment consists of those asset managers backed by banks, securities companies, insurance companies, futures companies and trust companies. All of them are looking to increase their overseas market share by opening offices in Hong Kong with a similar business model as the two other types of AMCs (see schematic diagramme, p. 18)
 
Recently, China has adopted a mega asset management (大资管) scheme. Here is where every fund manager is able to manage various asset classes such as banking assets, insurance assets, and corporate assets, which is different from international practice.
 
The rise and rise of Chinese asset managers has one big winner: Hong Kong. It is the first port of call for the majority of mainland asset managers with their offshore investment operations centralized in the territory. As of the end of 2016, non-Hong Kong investors, largely from mainland China, contributed 66.3% of total business to Hong Kong’s asset management industry.
 
Competition is stiff and likely to intensify in the coming years. China’s asset management industry has over 60 asset managers and over 100 fund managers managing over 10 trillion yuan of domestic assets. Contrast that with Hong Kong where the number of Chinese asset managers with the Type 9 licence from the Securities and Futures Commission (SFC) is already at 313 as of the end of the first quarter of 2017, accounting for nearly a quarter of the total Type 9 licence issued by the SFC.
 
Another source of liquidity is the QDII (qualified domestic institutional investor) scheme. Although the programme has been suspended for some time due to the weakening of the renminbi, a good chunk of the assets are held offshore, which can continue to leverage and invest in offshore assets.
 
China’s sovereign wealth fund, the National Social Security Fund (NSSF) with total AuM of US$349 billion, mandated 21 financial institutions, including 16 fund management companies, 4 insurance companies and a securities company, to manage its onshore assets in December 2016. In Hong Kong, NSSF also mandated two Chinese fund management companies, which are all subsidiaries of their onshore parents.
 
Another indicator of the growing prominence of Chinese investors is a recent finding revealed by Asset Benchmark Research (ABR), the capital market specialist research house, in which the proportion of nominated investors affiliated with Chinese asset managers and banks have risen in the annual ranking of most Astute Investors beginning in 2014. In terms of the proportion of votes, Hong Kong overtook Singapore in 2016 for the first time in the past five years as the centre of fixed income investing in Asian G3 bonds. The lead of Hong Kong also increased in 2017.
 
The sellside is also adjusting to the growing importance of servicing investors from China. Another study by ABR shows that a growing number of top-ranked analysts, economists/strategists, sales and traders in the G3 market have experience covering Chinese names or have previously worked with Chinese investment banks. “In-depth knowledge of Chinese credits and understanding the buying behaviour of Chinese investors are perhaps the most coveted skills in the market today,” believes the head of syndicate at a Wall Street investment bank.
 
 Indeed, the so-called China bid has transformed the risk/reward evaluation in Asia’s G3 bond market especially over the past three years. Impact of this demand is most evident in the compression of Chinese bond spreads, shares one sellside analyst with a US institution. “In turn, this has pulled the rest of the region’s spreads tighter as well resulting in Asia becoming the tightest spread within EM (emerging markets).”
 
ICBC’s Tan believes that despite globalization headwinds and trade protectionism, China’s structural reform and its determination to open its financial markets will play a vital role in furthering China and Hong Kong’s cross border asset management businesses. And in yet another reference to the domestic agenda at the heart of its global push, Tan states that ICBC Asset Management (Global) intends to “adhere to enhance our global flagship product offerings, providing ‘China solutions’.” 
 
Conversation
Nneka Chike-Obi
Nneka Chike-Obi
director, ESG research
Sustainable Fitch
- JOINED THE EVENT -
4th ESG Summit - Webinar series
Rising Expectations
Part 2 - Towards a green recovery
View Highlights
Conversation
Nor Masliza Sulaiman
Nor Masliza Sulaiman
group head investment banking, deputy chief executive officer
CIMB Investment Bank
- JOINED THE EVENT -
6th Global Islamic Finance Issuers and Investors Leadership Dialogue
Marking time as new opportunities emerge
View Highlights