Race in the New Era

Foreign Asset Managers in By 2016, there are 44 sino-foreign JV fund managers Foreign financial institutions will have more in China. The maximum foreign holding for those JVs options to enter China’s financial market. On were 49%. Although financially successful, foreign July 20, 2019, the Office of the Financial Stability asset managers built limited onshore capabilities. and Development Committee of the State Council announced 11 latest measures to open up the In 2016, China opened its private securities market to financial sector to foreign financial institutions. As foreign asset managers. Further market liberalization stated in the 11 measures, foreign financial in 2018 opened up huge institutional and retail institutions are encouraged to participate in the markets to foreign financial institutions with majority establishment and investment of wealth management stakes. In 2019, major foreign asset management subsidiaries of commercial banks. Also, foreign asset firms are taking a leap to obtain public fund licenses, management institutions are allowed to set up the competition in the arena of China asset controlled wealth management companies jointly with management market is now under way. subsidiaries of Chinese banks or insurance companies, and the participation in the establishment 2020 will mark the new era for foreign and investment of pension management companies asset managers by foreign financial institutions is permitted. These China may see the first WFOE FMC next year. On measures will accelerate the pace with which foreign April 10,2018, President Xi Jinping announced at the asset managers move into the domestic market. opening ceremony of the Boao Forum for Asia that Prior to this, on 30 June 2016, AMAC issued the China would further open up its markets to foreign “Questions and Answers regarding Private Fund financial institutions. The next day, the People’s Bank Registration and Recordation (10)”, and clarified that of China Governor, Yi Gang, announced 11 qualified overseas institutions can establish a wholly- measures. These included increasing the cap on owned private securities in China foreign shareholding of fund management companies (foreign private fund or WFOE PFM). From this point, (FMCs) from 49% to 51%, and removing it altogether foreign asset managers began to enter the Chinese by 2021. In July 2019, Prime Minister Li Keqiang market. announced at the opening ceremony of the 13th Summer Davos Forum that China would further open Since then, established foreign asset managers have up financial and modern services. China would launched private fund management businesses in remove the cap on FMCs by 2020 - one year ahead China. Fidelity was the first foreign player to receive a of schedule. license in January 2017. By April 2019, 19 WFOE PFMs had registered with AMAC and 33 products had been launched (Figure 1).

Figure 1：Registered WFOE PFM and number of products launched (by the end of April 2019)

WFOE CN Name License obtained date Launched products 1 Fidelity International 富达利泰 Jan-2017 4 2 UBS Asset Management 瑞银资产管理 Jul-2017 3 3 Fullerton Fund Management 富敦 Sep-2017 1 4 英仕曼 Sep-2017 2 5 景顺纵横 Nov-2017 1 6 Neuberger Berman 路博迈 Nov-2017 2 7 Value Partners 惠理 Nov-2017 5 8 Aberdeen Standard Investments 安本标准 Nov-2017 1 9 Blackrock 贝莱德 Dec-2017 2 10 施罗德 Dec-2017 1 11 AZ Investment 安中 Feb-2018 1 12 Bridgewater Associates 桥水 Jun-2018 1 13 Winton 元胜投资 Jun-2018 6 14 APS Asset Management 毕盛 Jul-2018 1 15 Eastspring Investments 瀚亚 Oct-2018 1 16 Mirae Asset 未来益财 Nov-2018 1 17 AB () Investment 联博汇智 Mar-2019 Nil 18 安联寰通 Mar-2019 Nil 19 D. E. Shaw 德劭投资 Apr-2019 Nil

Source: Asset Management Association of China Race in the New Era: Foreign Asset Managers in China Institutions and pensions market are out of reach for WFOE PFM, but investment advisor qualifications might open the door to the 30 trillion bank wealth market Although PFM WFOEs allowed foreign asset managers to access China’s wealth, according to China’s laws and regulations, the private funds are still prohibited from directly managing institutional funds. According to AMAC’s 2017 statistics, individual and corporates are the main investors in private securities investment funds (Figure 2). The huge national social security fund, and enterprise annuities are completely unavailable to private funds (Figure 3).

Figure 2：Breakdown of private securities investment Figure 3: restrictions on private fund investors (Including Chinese and foreign private funds funds), 2017

Institutions Invest in PFM 12.8% Social Security Fund ✘ 47.0% Enterprise Annuity ✘

Insurance Company Asset management product

Commercial Bank Asset management product 23.8% Securities Asset management product

Trust ✔ 16.4% Charity-public welfare fund ✔

Source: Public information, PwC analysis Individuals Corporate FOF Others

Source: Asset Management Association of China

Race in the New Era: Foreign Asset Managers in China The AM New Regulations and By comparison, wealth management products from Supporting Rules are reshaping the banks only account for 0.03% (Figure 4). This is only a small portion of the total wealth management asset management industry products market. It is expected that this proportion Under the AM New Regulations and Supporting will increase with the implementation of the AM New Rules, commercial banks can spin off their asset Regulations and Supporting Rules and the management businesses to form wealth management establishment of more wealth management subsidiaries. This will involve RMB 30 trillion of subsidiaries. wealth management products. Many large scale commercial banks have already obtained licenses to On 26 March 2019, Neuberger Berman and Fullerton do so. Under the AM New Regulations, private fund became the first PFM WFOE approved to provide managers can act as investment advisors to manage investment advisory services in Mainland China. the assets of the banks’ wealth management Many PFM WFOEs are still applying for this subsidiaries through or manager or qualification. managers structures. The “3+3” requirement on investment According to the “2017 China Private Securities advisor requires PFMs to expand their Investment Fund Industry Development Report”, investment teams AMAC reported that the AUM of private securities investment funds with fund managers acting as AMAC requires that private fund managers must investment advisors account for around a third of the meet the “3+3” requirement to qualify as an total. More than 80% of this comes from special investment advisor. I.e. there must be at least three accounts and trusts of fund companies and their fund managers with traceable records in China for subsidiaries. more than three years, and the company must not have had a bad record in the past three years. At present, many PFMs do not meet this requirement.

Figure 4：AUM Size and breakdown of private fund

Size and share of private fund products, 2017 Size Proportion Products (RMB billion, %) (billion) (by size,%)

AM scheme by securities 40.35 4.75% 850, 33% firm/ its subsidiary

Segregated account scheme by FMC/its 284.82 33.55% subsidiary

AM scheme by future 34.04 4.01% firms/its subsidiary

Trust scheme 460.11 54.20% 1718, 67% AM scheme by insurance 14.97 1.76% company/its subsidiary AUM as investment advisors Bank WMP 0.23 0.03% AUM as asset managers Others 14.45 1.7% Source: Asset Management Association of China

Race in the New Era: Foreign Asset Managers in China Public funds are the main battlefield Since the first batch of pension funds was for pensions. New entrants are not approved in August 2018, a total of 41 funds have been issued in three batches. eligible to participate until at least three years later In April 2018, the Ministry of Finance approved the implementation of the "Tax Deferred Individual The pension system in China can be divided into Commercial Pension Insurance Pilot" to further three pillars: the Basic Pension, the Enterprise promote the development of the third pillar pension Annuity and the Commercial Pension Scheme. By system. At present, public acceptance is low due the end of 2017, the total size of pensions reached to complicated procedures and other factors. 8 trillion RMB. Among them, the Basic Pension However, with continuous improvement of various was around 6 trillion RMB, 2.2 trillion of which was detailed rules, tremendous opportunities are national security fund, and the scale of delegated expected in pillar three. investment assets was about 1.3 trillion RMB. The Enterprise Annuity reached 1.3 trillion RMB, in Regulators have developed a series of public fund which almost 1 trillion RMB was delegated to pension management qualification requirements third-party asset managers. Unlike mature markets, (Figure 5). Commercial pension insurance requires such as the US, the third pillar has just begun. that the trustees must be founded at least two years prior. Besides, the three pillars all require Public funds play a dominant role in delegated that the trustees have recorded no illegal or non- investment of social security funds. Currently, compliant conduct over the previous three years. public funds account for 16 of the 18 delegated This requirement, in fact, enables the mutual funds asset managers. Among the 23 fund managers of to enter the pension market after at least three enterprise annuities, public funds also account for years. AUM of 20 billion is considered a universal 11 seats. Within the third pillar of pension threshold. Most public funds need to spend several insurance, which has been emerging in recent years to achieve this scale and maintain decent years, public funds have also become a key force. investment performance.

Figure 5：Qualification requirement for managing the three pillars

Pillar One Pillar Two Pillar Three Trustee Independent legal entity approved by Registered in China and approved by Entity relevant financial services regulatory Established for two years CSRC to qualify for fund management bodies, PRC registered AUM ≥ RMB 20 billion (incl. securities AUM ≥ RMB 20 billion (excl. MMF) investment fund, asset mgt. for specific Registered capital ≥ RMB 100 million for the past three years Size client, EAP, QDII and QFII) Net assets ≥ RMB 100 million The performance of the fund is Paid-in capital ≥ RMB 100 million at any time mature and steady and net assets ≥ RMB 100 million at any time Professional employees (research, Professional employees for SSF Number of employees qualified as an investment etc.) ≥ 20 Staff investment enterprise annuity professional meets Incl. ≥ 3 fund managers for the minimum requirements pension target fund Facility N/A Appropriate office space and equipment N/A

Compliance No illegal or non-compliance conduct for the past three years

Source: Public information, PwC analysis.

Top foreign asset managers are Route two: Convert a private fund manager to a acquiring fund management company manager. Companies are preparing to apply to be mutual fund managers and target to open (FMC) licenses their business in 2020. For many global foreign asset managers, setting up a PFM WFOE is the first step to entering China’s vast Route three: M&A – Companies are looking for ways financial markets. More and more foreign asset to gain control of the target from existing FMCs. managers are looking for ways to increase their However, there are not many targets on the market. investments in public fund management companies. As such, the value proposition to the JV is a key to There are several ways to do this. success.

Route one: Increase the shareholding. Foreign asset Route four: E-commerce and investment advice – managers are purchasing more shares from the foreign asset managers and e-commerce companies original joint venture (JV) partner to increase their are setting up investment advisory joint ventures. E- stake. commerce companies’ access to a broad customer base is attractive to foreign managers.

Race in the New Era: Foreign Asset Managers in China Strategic development implications for 4. You might consider acquisition to accelerate market access. foreign asset managers 5. Qualified asset management companies may • Consider your China strategy as a whole consider applying for wealth management China will continue to contribute significantly to the subsidiaries of commercial banks, setting up future growth of the global asset management controlled wealth management companies jointly market. However, it requires more and bigger with subsidiaries of Chinese banks or insurance investments. companies, as well as applying for pension management companies and FMCs. Foreign asset managers should set broad strategic goals, which align with and reflect China’s policies as they are announced. • Tailor your identity for China, but 1. One plus one: On 13 June 2019, the People’s don’t lose it Bank of China officials proposed a policy of “one The investment capabilities of a foreign asset plus one” in the context of foreign investment in manager may not be easily or directly transferrable to the Lujiazui Financial Forum. This means that a the Chinese market. Careful evaluation of resources foreign institution can be a shareholder of no is required. more than two fund management companies, and can be the controlling shareholder of only Your channel or investment capabilities are not easily one of them. If a foreign asset manager is transferrable to the China market. You need to already a minority shareholder of a joint venture evaluate the key resources and capabilities owned by fund company, it can still set up another the enterprise, and identify those that can be the key controlled entity. However, the foreign asset success factors in this unique market. There are manager would need to consider how to intricacies in its regulatory environment, investors’ strategically position the two companies in the mindset, and the market in general to be aware of. future, if they hold the same license. Foreign asset managers need to understand and be mindful of the differences, localize their strategies 2. Converting between PFM and FMC: Institutions and operating model. that choose to convert from PFM to FMC should consider the investment goals and path of the PFM, how it should positon itself in the market, • Partnerships might still be an option and its exit. Careful consideration could lead to Foreign asset managers can consider partnering with high investment returns. local companies with complementary capabilities. 3. The regulatory requirements for an FMC are Being a majority shareholder means that foreign more complicated than those for a PFM. It asset managers can make better use of their industry requires a lot of local effort and preparation. experience and build a sustainable and collaborative model for the future.

Race in the New Era: Foreign Asset Managers in China 7

PwC's consulting services

Strategy formulation and evaluation

• Analyze the present state and future trends of China’s private fund industry, including customer needs, products/investment strategies, channels, and competitive landscape, etc., to help foreign institutions fully understand the market; • Help private fund managers develop and evaluate market entry/expansion strategies, identify strategic opportunity and entry methods; • Analyze the impact of policy changes, and provide advice on customers, products, licenses, etc.

Merger and acquisition transaction

• Assist foreign institutions to find acquisition targets in the China market, and provide systematic assessment of the overall financial and business situation of the selected target asset management company; • Analyze the overall control model of the foreign institutions to its subordinate company post-M&A, pay attention to corporate culture, talent protection, business integration and reshape the acquired company.

Organizational structure design

• Assist foreign institutions to design organizational structure and positions to match the company’s strategy； • Formulate compensation strategy and domestic market alignment plan, design the salary levels, long- term incentive mechanisms that are in line with industry practice and the current state of the company.

Internal control assessment

• Comb the company's internal control process, identify risks and provide recommendations to strengthen risk management according to regulatory requirements; • Share best practice for internal controls in the industry.

Digital transformation

• Analyze the current situation and future development of digitization in China’s asset management industry and international financial markets； • Help formulate the digital strategic plan of private fund managers so as to realize the empowerment of financial science and technology for business. This can encompass all aspects of asset management services, including sales promotion, investment and research management, risk management and so on.

Race in the New Era: Foreign Asset Managers in China Contacts

Jane Xue PwC China Asset and Wealth Management Leader +86 (21) 2323 3277 [email protected]

Fang Fang PwC Strategy& Financial Service Consulting Partner +86 (21) 2323 2395 [email protected]

Marie-Anne Kong PwC Asset and Wealth Management Leader +852 2289 2707 [email protected]

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. © 2019 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. No. 000565