China Funds Sector to Present “Tremendous Opportunities” for Investors

Regulators have shown willingness to revisit and adjust restrictions on market access

Wednesday, December 7, 2011 8:08 am EST

Dateline:

HONG KONG
"While there is great interest in the offshore yuan market, much needs to be done. A trading and settlement infrastructure needs to be established, and a full range of products developed"

China’s managed funds sector has experienced rapid growth recently, but foreign investors continue to remain significantly underweight on Chinese assets because of market constraints, according to State Street’s latest Vision Focus paper entitled “China’s Funds Future.” The report says that key macro trends and regulations are improving access to China’s investment industry, however, and it identifies a way forward for international fund managers operating in the market.

China’s powerful economy has driven growth in its financial markets and propelled the managed funds sector to more than US$335 billion in assets under management last year, creating enormous opportunities for both domestic and international investors. The sector’s continued growth will be driven in large part by the government’s stated interest in transforming its export-led economy to a more domestic-driven model.

The report, which was written by authors including Sau Kwan, senior vice president and managing director at State Street, says that while regulations have created barriers for both inbound and outbound investors, China’s financial markets authorities have shown a consistent willingness in recent years to revisit and adjust regulations. For example, the China Securities Regulatory Commission (CSRC) announced in June 2011 that independent financial advisers meeting certain criteria will be able to distribute funds in China.

In addition, the latest proposed expansion of the qualified foreign institutional investors (QFII) scheme, known as the renminbi (RMB) qualified foreign institutional investors (RQFII), would allow domestic Chinese brokerages and fund companies to raise money offshore for investment in the domestic markets. This is directly linked to China’s desire to expand the use of RMB outside its borders.

The report also highlights the unique role that Hong Kong has played as an offshore RMB center for China while it takes steps toward liberalizing and internationalizing its currency. Banks in Hong Kong offer a range of RMB-denominated retail banking services, such as deposit-taking, currency exchange, remittance, debit and credit cards, cheques, and the subscription and trading of yuan bonds, as well as yuan trade settlement. RMB deposits in Hong Kong stood at 553.6 billion yuan as of June 30, 2011, up 57 percent from year-end 2010, according to the Hong Kong Monetary Authority.

“While there is great interest in the offshore yuan market, much needs to be done. A trading and settlement infrastructure needs to be established, and a full range of products developed,” the report said. “The lack of liquidity is also seen as a major problem.”

The report concludes that China’s funds sector represents a significant long-term strategic play for foreign fund managers but recommends that they remain vigilant in aligning with regulatory changes in the market. The industry would also benefit from the best practices and outsourcing offered by third-party service providers, the report contends.

“Outsourcing middle- and back-office operations would free up domestic asset managers to focus on their core competencies, improve profitability and support faster product launches and international expansion,” the report said. “Third-party providers represent a key ingredient in raising the quality of China’s domestic asset management operations, increasing product range and facilitating the domestic industry’s outbound goals.”

About State Street
State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $21.5 trillion in assets under custody and administration and $1.9 trillion* in assets under management at September 30, 2011, State Street operates in 26 countries and more than 100 geographic markets. For more information, visit State Street’s web site at www.statestreet.com.

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Citigate Dewe Rogerson
Charlotte Bilney, +852 9314 3463
charlotte.bilney@citigate.com.hk
or
Jason Tse, + 852 6273 6471
jason.tse@citigate.com.hk

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