Fitch Ratings reports that international investment managers are getting closer to cracking the funds market in Mainland China.

BlackRock's full licence for its onshore Chinese investment management company represents a milestone in the growing competition between international asset managers in the country, Fitch Ratings says. The announcement by the China Securities Regulatory Commission on 28 August 2020 that it had granted the licence follows closely behind JPMorgan's acquisition of China International Fund Management (CIFM), which has been reported in various media reports.

International investment managers have been active in China for some time, although their access to the Chinese market has been limited to joint ventures or private fund management licences. BlackRock's licence approval and JPMorgan's reported completion of its acquisition of CIFM enable both managers to enter the Chinese investment management market in full. This differentiates them from other international managers - such as Fidelity and Neuberger Berman - which are still in the licence approval process. Recent press reports indicate that Vanguard is planning a move of staff to Shanghai from Hong Kong, providing further indication of the importance that international investment managers attach to China, despite ongoing tensions between the US and China.

Succeeding in China will be challenging for international investment managers in light of the differences in practices - notably in terms of distribution - between China and other markets. Fund distribution in China typically involves distribution platforms and/or other intermediaries, which can conflict with international managers more accustomed to direct distribution to end-investors. A major driver of the growth of money market funds in China, the largest fund type by a significant margin, has been electronic distribution via mobile apps such as WeChat. Comparable distribution methods do not exist in international markets.

International managers will also face stiff competition from domestic investment managers, which often benefit from greater brand recognition, and broader institutional understanding of markets and cultural dynamics. They are also likely to be more attuned to political and regulatory insights. Conversely, international investment managers may be able to offer a wider array of investment products than purely domestic managers due to their global presence, thus attracting investors. Those international managers with stronger risk-management processes or deeper investment expertise may also be at an advantage compared with purely domestic managers. Investment expertise will be particularly important - those managers who consistently outperform, be they international or domestic - will be more likely to attract and retain assets.

With CIFM, JPMorgan acquired an active investment manager operating at a moderate scale in China, with mutual fund assets under management (AUM) of CNY 133 billion (USD 19 billion) at end-June 2020 ranking it as the 36th-largest mutual fund manager in China. The acquisition cost of CNY 7 billion (USD 1 billion) for the remaining 49% of CIFM that JPMorgan did not already own, according to a report in the Financial Times, represents nearly 11% of AUM. By contrast, BlackRock's steps thus far suggest more of an organic approach to expanding its presence in the Chinese market. Whether the 'build' or 'buy' approach will ultimately prove more successful will depend on many factors, although the scale, diversity, brand recognition and performance records of the two institutions should support both approaches.

Fitch believes market liberalisation and structural underlying factors will drive the growth of China's mutual fund sector. China's open-end mutual fund assets were CNY15 trillion as of end-June 2020, ranking it the fifth-largest mutual fund domicile worldwide. Growth in China - 70% over the three years to end-1Q20 - outstripped global mutual fund growth of 12% over the same period.

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Fitch Ratings reports that international investment managers are getting closer to cracking the funds market in Mainland China.

BlackRock's full licence for its onshore Chinese investment management company represents a milestone in the growing competition between international asset managers in the country, Fitch Ratings says. The announcement by the China Securities Regulatory Commission on 28 August 2020 that it had granted the licence follows closely behind JPMorgan's acquisition of China International Fund Management (CIFM), which has been reported in various media reports.

International investment managers have been active in China for some time, although their access to the Chinese market has been limited to joint ventures or private fund management licences. BlackRock's licence approval and JPMorgan's reported completion of its acquisition of CIFM enable both managers to enter the Chinese investment management market in full. This differentiates them from other international managers - such as Fidelity and Neuberger Berman - which are still in the licence approval process. Recent press reports indicate that Vanguard is planning a move of staff to Shanghai from Hong Kong, providing further indication of the importance that international investment managers attach to China, despite ongoing tensions between the US and China.

Succeeding in China will be challenging for international investment managers in light of the differences in practices - notably in terms of distribution - between China and other markets. Fund distribution in China typically involves distribution platforms and/or other intermediaries, which can conflict with international managers more accustomed to direct distribution to end-investors. A major driver of the growth of money market funds in China, the largest fund type by a significant margin, has been electronic distribution via mobile apps such as WeChat. Comparable distribution methods do not exist in international markets.

International managers will also face stiff competition from domestic investment managers, which often benefit from greater brand recognition, and broader institutional understanding of markets and cultural dynamics. They are also likely to be more attuned to political and regulatory insights. Conversely, international investment managers may be able to offer a wider array of investment products than purely domestic managers due to their global presence, thus attracting investors. Those international managers with stronger risk-management processes or deeper investment expertise may also be at an advantage compared with purely domestic managers. Investment expertise will be particularly important - those managers who consistently outperform, be they international or domestic - will be more likely to attract and retain assets.

With CIFM, JPMorgan acquired an active investment manager operating at a moderate scale in China, with mutual fund assets under management (AUM) of CNY 133 billion (USD 19 billion) at end-June 2020 ranking it as the 36th-largest mutual fund manager in China. The acquisition cost of CNY 7 billion (USD 1 billion) for the remaining 49% of CIFM that JPMorgan did not already own, according to a report in the Financial Times, represents nearly 11% of AUM. By contrast, BlackRock's steps thus far suggest more of an organic approach to expanding its presence in the Chinese market. Whether the 'build' or 'buy' approach will ultimately prove more successful will depend on many factors, although the scale, diversity, brand recognition and performance records of the two institutions should support both approaches.

Fitch believes market liberalisation and structural underlying factors will drive the growth of China's mutual fund sector. China's open-end mutual fund assets were CNY15 trillion as of end-June 2020, ranking it the fifth-largest mutual fund domicile worldwide. Growth in China - 70% over the three years to end-1Q20 - outstripped global mutual fund growth of 12% over the same period.