Markets and Securities Services | China’s 2020 vision for global fund managers 1 CHINA’S 2020 VISION FOR GLOBAL FUND MANAGERS Around 25 years ago, the authorities in China began to develop their capital markets ambitions. Stock exchanges were opened in Shanghai and Shenzhen. Members of the general public were allowed to buy stocks and shares on the market, albeit their choices at the time were limited to mainly (former) State-Owned Enterprises (SOEs). Talks also began for allowing the creation of mutual funds and the setting-up of fund management companies. Few would have believed, at the time, that by In July 2019, it was announced that the date for 2019 China’s stock markets in aggregate would 100% foreign ownership of fund management become one of the top-three largest in the companies would be brought forward to world by size and the largest by trading volume. sometime in 2020, and in October 2019 it was The aggregate scale of the assets managed in confirmed this would apply from April 2020. mutual funds, wealth management products and These announcements confirmed that non- other schemes made available to citizens now Chinese firms could own 100% of a Mainland exceeds approximately USD20 trillion. Chinese fund management company, allowing unrestricted access to offer investment services There’s a fantastic success story to be told. Yet and products to the retail market. for the most part, many of the top prizes to date have been reserved for domestic businesses in During the last three years, Chinese regulators China. Foreign firms, i.e. global fund managers, have opened up the markets for foreign have faced multiple restrictions on what they can participation and accelerated progress across do to set up and operate a business in China. many fronts in the securities markets. But all this is changing! China is opening up, Our full report provides suitable information and there are many opportunities for global and background for global fund managers players to participate. considering whether or not to set up offices and do business in Mainland China. It should be noted: there’s nothing easy or straightforward 100% foreign ownership in 2020 about doing so and that regulations have During the November 2017 meeting with US changed frequently. That said, China is also very President Donald Trump, China’s President ambitious and sees itself having a prime place Xi Jinping announced his intention to allow on the top table of the world’s leading financial 100% foreign ownership of securities and markets. To get there, it’ll have to open up a lot fund management businesses in China within more and benefit from the undoubted expertise three years. that major global firms can bring to its market. At the Bao Forum in March 2018, this decision was confirmed and further details were given as Routes into and out of Mainland China to what it would entail over the following three There have been, and continue to be, many years to 2021. routes into the Chinese securities markets. These have often been accompanied by quota In April 2018, in a historic joint statement, restrictions. In recent years, many of these principal securities, banking and insurance quota restrictions have been removed and some regulators announced new asset management of the schemes have been terminated as access rules with the objective of totally transforming routes became fully open to foreign investors. the current market landscape for wealth management, for the distribution of products and for the fund management industry. Markets and Securities Services | China’s 2020 vision for global fund managers 2 China’s 2020 vision for global fund managers: key drivers Changes are taking place that will transform fund management: • Regulatory changes in 2019 promise to accelerate the opening-up of fund management for domestic life insurance and pensions businesses, for banks and for foreign fund managers. • From April 2020, foreign fund managers will be allowed to own 100% of domestic retail fund management companies. The People’s Republic of China (Mainland China, China)* The world’s most populous country: 1.4bn (2017). 16 cities with a population of more than 4m. The third-largest country by size: 9.6m sq km. 3 cities with a population of more than 10m. 22 provinces, 5 autonomous regions, 4 directly controlled municipalities, 338 billionaires and 3.5m millionaires (2018). 2 special administrative regions. The second-largest global economy Regulated funds of over USD2tn (Q3 2019). (by nominal GDP). Unregulated wealth management products The second-largest equity and bond markets issued by banks of over USD6tn. globally (by turnover and size). A private and trust funds market of over 50 cities with a population of more than 1.5m. USD6tn. * AMAC, Oliver Wyman, Z-Ben, CSRC, Citi and public sources Population pyramid 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 65 52 39 26 13 0 0 13 26 39 52 65 Population (millions) Age Group Population (millions) Source: www.cia.gov, 2019 Seeing China’s age and sex structure can provide insights into the country’s political and social stability and economic development. This pyramid shows males (left) and females (right) along horizontal axis in five-year age groups (horizontal bars), with the youngest at the bottom and the oldest at the top. Its shape gradually evolves over time, based on fertility, mortality and migration trends. Markets and Securities Services | China’s 2020 vision for global fund managers 3 Arguably, the most successful of these Bond Connect has also been developed to routes has been Stock Connect, whereby give global investors direct access to the global investors can make direct purchases wide range of bond and fixed-income issues of Mainland China A shares via a securities in China. While the China Interbank Bond broker account in Hong Kong. This is a Market route attracted much interest at two-way facility that has also been very first, Bond Connect appeals to a larger, more successful in enabling Chinese investors to diverse audience and has resulted in a high buy Hong Kong-listed securities. degree of self-control for managers using it. Another of the routes is Mutual Recognition of Funds (MRF), which allows mutual funds R/QFII and unit trusts domiciled in China and Hong The Qualifying Foreign Institutional Investors Kong cross-border access for local investors (QFII) scheme was first set up in 2002 as a in each other’s location. MRF acts as a way in which to allow global fund managers funds-passporting scheme. To date, there some limited but direct access to Mainland has been limited success, with around 20 China equity and bond securities markets. Hong Kong-domiciled funds approved for Quotas were given to individual asset owners sale in China and around 50 Chinese funds or fund managers. Some restrictions were approved for sale in Hong Kong. Industry applicable to the extent of turnover allowed, observers believe the longer-term nature to the repatriation of assets and to profits. of this development and the potential for The “R” version, whereby assets could be future success will see an increase in the held in renminbi, was launched in 2011. numbers of eligible funds and so greater competition among distributors. Markets and Securities Services | China’s 2020 vision for global fund managers 4 More than 500 licences for the two schemes to access global stock markets, but, with a have been issued, raising more than USD200 limitation on the size of quota, demand has billion.1 In September 2019, that aggregate perpetually exceeded supply. As an example quota for the two schemes was removed. To of this, Citibank in China has a QDII quota of some extent, both Stock Connect and Bond more than USD3bn, which is mainly used to Connect via Hong Kong have superseded enable Citibank customers in China access to the need for the R/QFII schemes, as they global mutual funds. have allowed considerably more flexibility in owning and managing China securities at The illustration below shows the breadth lower costs. of the Chinese asset management industry. Each of the major sectors — bank wealth management products, trusts, private funds, R/QDII securities companies, fund management The Qualifying Domestic Institutional companies and insurance companies — have Investor (QDII) scheme was established a growth path that is truly impressive. Each in 2006 to allow qualifying institutional is being urged, by the Chinese regulators, investors, either as asset owners or on behalf to work more closely with global partners, of clients (usually in the case of banks), to whether in a joint venture or by contracting have a limited form of access to foreign their expertise. mutual funds and securities. There have been over 150 licences issued and a quota of approximately USD100 billion.2 For many in China, this has been the only official route China asset management industry by sector (USDtn) Oliver Wyman, Citi and Market sources. 30,000 Futures AM 27,573 Securities firm AM 25,000 Insurance AM 20,000 19,067 Private funds 17,304 16,266 16,154 14,629 15,000 Bank WMP Trust 10,000 FMC subsidiary 5,000 FMC seg account 0 Mutual fund 2015 2016 2017 2018 2019 Q2 2023 F Markets and Securities Services | China’s 2020 vision for global fund managers 5 Markets and Securities Services | China’s 2020 vision for global fund managers 6 Why should global fund managers be interested in China? USD17tn+ market growing Key players’ market share in China’s at 13% a year asset management industry (Q3 2019) The main reasons for this global interest in CBIRC-regulated commercial banks, insurance the Chinese investment management markets companies and trust companies account for is their size and scale and their potential 55% market share of the aggregate size of growth forecast over the next five to 10 the asset and funds management wallet.