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source from：FT
https://www.ft.com/content/81d184f6-25aa-11e7-8691-d5f7e0cd0a16
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Asset managers rush to launch onshore funds in China
Many international fund houses move to set up wholly foreign-owned enterprises
AN HOUR AGO by: Jennifer Hughes in Hong Kong
If one international asset manager has a licence to launch funds in China, they all want one, it seems.
Since Fidelity International said in January it had won the first-ever approval to launch onshore investment products in China, a steady stream of rivals have set up their own wholly foreign-owned enterprises, known as WFOEs. Invesco and Neuberger Berman joined the club just last week.
The aim for many of the recent entrants is to begin operating in China’s booming private funds market without having to be the minority partner in a locally controlled joint venture.
The longer-term goal is that if this goes well, international managers will eventually be granted wider access to the country’s fast-developing retail fund market.
But like many aspects of business in China, the process and the potential of the scheme are both still works in progress. And establishing a WFOE, pronounced wuff-ee, with the necessary permits attached, is only the beginning.
These licenses have been permitted for years in some areas, such as raising funds from investors in China for investment overseas under the qualified domestic limited partnership (QDLP) scheme. But the opportunity to control a full-scale operation on the ground has prompted a rush of new applications.
Asset managers that have joined the WFOE club in recent months include Vanguard, Axa Investment Managers, Credit Suisse and Manulife, while Hong Kong’s Value Partners won approval for a second WFOE that includes “asset management” in its title — necessary for the private funds market.
Both Invesco and Neuberger Berman made it clear last week that their goal is access to the private funds market.
The dash follows the announcement last June by the Asset Management Association of China (AMAC) that it would welcome applications for private fund management operations, which allow investment managers to market onshore funds to wealthy individuals as well as institutions.
China and the US have argued over allowing foreign managers onshore access for years. The decision to do so now is seen as part of an industry clean-up by AMAC, a self-regulatory group that has also deregistered thousands of smaller asset managers.
“There were quite a lot of people back then [in the investment industry] playing it not so straight. Far too many funds had launched; it was not feasible,” says Nicholas Omondi, an analyst at Z-Ben Advisors, the China-focused consultancy. “Part [of fixing this] was the regulatory clean-up, and part was the introduction of funds that would be competitive and help the industry play it more straight and narrow.”
Assets committed to China’s private funds doubled last year to Rmb10.24tn ($1.5tn) and grew another 7 per cent in the first month of this year, according to AMAC data.
Fidelity is still the only group to have AMAC approval. It must launch its first product within six months, a process that Daisy Ho, Fidelity’s head of Asia excluding Japan, says is on track and would follow the company’s traditional “building blocks” approach.
“It is not about gathering a lot of assets through the first product, it is about developing a full suite of products over the next five years,” she says. “In China, being first is important. When we talk to regulators and clients, a lot of them say we should set the example.”
Fidelity has a large operation on the mainland, including 500 staff in Dalian, a city in the north-east of China, as well as an analyst team in Shanghai. It may be one of the few companies able to set that example, since a full on-the-ground operation is important for approval from AMAC.
“There is a lot of interest from Chinese investors, but it is going to be quite costly and a lengthy process for internationals to be ready to do this,” says Ying White, a partner at Clifford Chance, the law firm, and head of its investment management practice in China. She cautions that existing experience would not necessarily have covered all bases.
She adds: “What this means is investment managers will have to get everything ready and every stakeholder signed off before they even go to the regulator.”
For international managers, a significant attraction of a WFOE is the chance to go it alone. Many have a presence in China via joint ventures, where foreign stakes have been capped at 49 per cent. Success has been mixed, depending on the partner and the choice of market. Foreign asset managers have also been wary of sharing their technology and proprietary processes with mainland colleagues.
Yet full-scale localisation is no easy exercise, as this must cover a team that ranges from investment analysis through to a distribution network and the ability to cover local legal issues. China’s securities regulators also set exams only in Chinese, making it almost impossible for fund managers to import global talent to help develop a shared culture.
Still, industry watchers expect others to win AMAC approval soon, although many will take longer to build the necessary company infrastructure.
“Looking beyond to what a lot of the global funds have in mind, they have vanilla operations outside China, and they are looking at the possibility to convert these funds into [products that can be sold onshore],” says Mr Omondi. “There is definitely a business case — if it is done right.”
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