China continues to draw huge interest from overseas asset managers. Although the pace of wholly foreign-owned enterprise private fund manager (WFOE PFM) units setting up in the country has slowed – marking a historical low last year – the number of new funds launched by existing players has reached a historical high.

While facing various challenges such as understanding the Chinese market and expanding fund sizes, WFOE PFMs strive to find better ways of capturing opportunities in the vast market.

Overseas asset managers set up WFOE PFMs in China with the aim of raising funds and investing them onshore. It’s been five years since the first WFOE PFM was registered in 2017. The market has been growing at a steady pace, and so far there are nearly 40 such institutions. It saw a historical low in 2021, when there were only four new registrations, compared with nine in 2020 and seven in 2019.

Most WFOE PFMs start off with small fund sizes, according to local Chinese and global services providers who offer their custody and fund administration services. About 80% of players have a fund size below 500 million yuan (US$75.6 million). Bridgewater took three years to become the first – and so far only -- WFOE PFM to surpass 10 billion yuan in assets under management in late 2021.

In the meantime, players have been quite active in rolling out new funds, with the market seeing WFOE PFMs launching 74 new funds in 2021, a historical high.

WFOE PFMs face different challenges at different stages. One key issue is the lack of understanding of trading practices and regulations, according to service providers who work closely with WFOE PFM clients. Given the situation, many securities firms who are experienced in trading and have a good understanding of the regulatory environment have stepped up to support the newcomers.

As WFOE PFMs get more familiar with the China market, their focus starts shifting to growing their sizes. Many service providers, especially the banks, believe that mutual funds can be one of the most effective ways for WFOE PFMs to expand in China, especially given that many of these players have solid mutual fund management experience in their home markets. Four overseas asset managers have received licences to manage mutual funds in China, with BlackRock rolling out the first such product last year.

Banks expect to see more of such conversions in the future, and this is good news for them: entering the mutual fund business means asset managers will need more distribution support from their service providers. This poses a challenge for the securities firms who have been gaining market share in servicing WFOE clients.

There is discussion on whether WFOE clients who have been serviced by securities firms will now turn to local banks that have more extensive distribution channels. However, it is fair to say that while local banks are more experienced in distributing fixed-income products, securities firms will have a role to play in offering equity mutual funds to their clients.