Over the past decade, China's asset custody business has undergone remarkable growth, expanding 13-fold in ten years from 13.87 trillion yuan in 2011 to a staggering 190.75 trillion yuan (US$27.27 trillion) in 2021 in assets under custody (AUC). However, last year’s market complexities and regulatory reforms have brought about significant changes to the industry's landscape. As asset servicing providers continue to seek business opportunities, new and emerging trends are reshaping the Chinese custodian sector both from onshore and offshore perspectives.

Last year saw a highly volatile and complicated market, with most asset classes experiencing a downturn. It was certainly a very challenging year for the country’s 27 custodian banks with an estimated AUC of 199 trillion yuan as of end 2022 .

Chinese regulators have rolled out new rules to enhance supervision and guide custodian service providers to focus on their core business. As part of these changes, approximately 40 trillion yuan of the 199 trillion yuan in AUC has been redefined as "other types of custodians” such as services related to second-hand house trading and prepaid accounts for purchasing houses. Going forward, these businesses will no longer be considered part of the custodian banks' AUC, signalling a shift towards greater clarity in custodian services.

Wealth management subsidiaries of banks have been hit hard, with their AUM seeing a double-digit decrease. This is turn has impacted their custodian business. On the other hand, as these wealth management units are still in their early stages of growth, they have a strong demand for outsourcing services such as fund administration. Both local and global service providers are raring to grab these new opportunities. More and more banks are setting up dedicated teams to tap this market.

The mutual fund market, another important component of the asset management industry in China, also faced challenges last year. While some mutual fund managers were able to launch new products, it proved quite difficult to time these launches. Amid all the market uncertainties, the ability of custodians to streamline the onboarding process has emerged as a key factor in ensuring the success of a launch.

Custodians of private funds remain a key market segment for securities firms. Service providers in this sector have focused on improving their service quality and offering innovative solutions to cater to the evolving needs of private fund managers. These efforts contribute to the overall enhancement of the custodian industry's standards and effectiveness. Banks, on the other hand, are also tapping the opportunities in the private fund space both as custodians and fund administrators.

China access has been a recurring topic of interest, but custodian banks observe that their clients are increasingly moving away from direct schemes like QFI and CIBM Direct towards Connect schemes to tap into onshore opportunities through Hong Kong. This shift signifies a desire for streamlined access to Chinese markets while leveraging the flexibility and infrastructure in Hong Kong.

The QDII market gained robust growth momentum last year, facilitated by relaxed regulations. Chinese institutional investors exhibited a strong demand to diversify their investments overseas, leading to opportunities in the custodian market. Notably, some large insurance QDII clients have shifted away from US service providers, opening doors for new players such as European bankers. Chinese banks, although dominant in the market, face increasing competition from international players in this evolving landscape.

Global custodian banks remain interested in obtaining local fund custody licences in China. Some of the global banks have secured mandates from local mutual funds and wholly foreign-owned enterprise private fund managers (WFOE PFMs). However, expanding their China business has proved challenging in view of the regulatory complexities. To tap into the 199 trillion yuan opportunity, custodian banks must leverage their capabilities to collaborate with third parties effectively.

Against this backdrop, The Asset announces the best asset service providers in China.

Please click here to view the full list of winners.

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