China: Wealth Management
As in so many other areas, the legal framework for asset management in China is lagging behind the demands of the market. The extant laws are as follows:
- Trial Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors, 2007
- Measures for the Administration of Securities Investment within the Borders of China by Qualified Foreign Institutional Investors, 2006
- Law of the People's Republic of China on Funds for Investment in Securities, 2004
- Securities Law of the People's Republic of China 1999
The current situation is that foreign investment management companies are limited to 49% participation in Chinese asset management vehicles. This hasn't stopped Western firms from piling into the market, which has been booming for the last ten years, as would be expected.
McKinsey says that asset management grew by 60% a year between 2004 and 2007, and was continuing to grow at 24% annually, making it the fastest-growing financial services industry sector in China, and for that matter in the world, prior to the global financial crisis. For 2011, McKinsey reported AuM growth of 7% in China.
The Galaxy Securities Fund Research Center reported that, by the end of 2007, the total Asset Under Management (AUM) of 363 identified Chinese mutual funds reached RMB 3.27 trillion, which was 282% larger than the previous year’s RMB 856.5 billion.
Obviously, wealthy Chinese don't want to be limited to investing their money in Mainland China. But the lack of convertibility of the currency stands in their way, not to mention restrictions on permitted investments for asset managers>. The result has been that for many years the border between China and Hong Kong has been extremely porous: in legitimate and illegitimate ways, the game has been to get as much of your money out of China and into Hong Kong or American dollars as fast as you can.
In response, the Chinese authorities talked for years about regulations to permit overseas investment by asset managers, known as QDII regulations, and these finally struggled into life on a trial basis in 2007. This is a subject for the next section, on offshore investment, but at least now Chinese asset managers (including those run in practice by minority Western partners) are able to offer a spread of assets.
As just one example of the sort of hybrid that emerged after the 2004 law came into effect permitting joint ventures in asset management between Chinese and Western players, we can instance BOCIM, which is a partnership between Bank of China and Blackrock (Merrill Lynch Investment Managers) which opened its doors in 2004.
In August, 2010, the People's Bank of China published a guide announcing measures to open up the gold market in China. The Central Bank said the gold market would be opened up in stages with the following moves:
- More commercial banks will be permitted to import and export gold;
- Foreign exchange trading restrictions will be relaxed for gold trading;
- Chinese banks will be permitted to hedge gold positions overseas;
- Overseas players may be allowed greater participation;
- Shanghai Gold Exchange and Shanghai Futures Exchange will be encouraged to play a greater role in the market; and
- The tax regime may be adjusted to facilitate trading and investment.
The initiatives were reported to be in response to increasing private demand in China, as domestic production is increasingly unable to satisfy domestic demand; China is the world’s leading producer of gold and also the second largest consumer after India.
The improvement in the range of gold-based financial products could reduce the need to increase physical imports. The government itself is not seen to be a gold investment enthusiast, holding less than 2% of its reserves in gold.
In September, 2010, E Fund Management (E Fund) said it was set to launch China's first hedge fund following a change in securities regulations earlier this year allowing investment managers to trade stock index futures on behalf of clients.
E Fund is currently in the process of seeking regulatory approval from the China Securities Regulatory Commission (CSRC) to offer its hedge fund to high-net-worth individuals through separately managed accounts. The fund has said that its new fund would seek to "hedge market risk through stock index futures and other tools" and will charge the familiar '2-20' fee structure used by most hedge founds elsewhere in the world.
In July, the Chinese authorities announced that rules would be relaxed to allow separately managed accounts to trade stock index futures, permitting fund managers to hedge against declines in the CSI 300 stock market index, which replicates the performance of the top 300 companies listed on the Shanghai and Shenzhen stock exchanges. It is understood, however, that the CSRC will only loosely regulate hedge funds targeted at wealthy individuals.
Founded in April 2001, E Fund is owned by five Guangdong-based shareholders, including Guangdong Finance Trust Company and GF Securities Co., Ltd. As at the end of December 2010, E Fund had in excess of RMB197bn (USD30bn) under management, making it one of the largest asset managers in China.