Foreign Asset Management Firms in China's Market: Current Landscape...

Title:Foreign Asset Management Firms in China's Market: Current Landscape, Competitive Edge, and Future Prospects

Author:FANG Yunlong , CHAI Hongrui

The Central Financial Work Conference has emphasized the need to promote high-level financial openness and safeguard national financial and economic security. As such, it is imperative to encourage both inbound and outbound financial activities, expand institutional opening-up, streamline cross-border investment and financing, and attract international financial institutions and long-term capital to stimulate China's economy. The further opening-up of China's financial sector, its growing appeal to foreign investors, and the rising demand for asset management among Chinese residents have prompted foreign asset management firms to actively participate in China’s market. This participation has fostered competition and innovation among domestic firms. Going forward, in the context of high-level financial opening-up, domestic and foreign asset management firms should leverage their respective strengths to collaborate for mutual benefit and engage in healthy competition, thereby promoting the high-quality development of China's asset management industry.

Background

In recent years, China's financial sector has been opening up at an accelerated pace. Policies have been introduced to relax shareholding restrictions on foreign financial institutions. The Special Administrative Measures for Foreign Investment Access (Negative List) (version 2020) has cleared foreign investment access. And the CPC Central Committee and the State Council issued an Action Plan for a High-standard Market System in January 2021. This plan emphasized the orderly opening-up of the financial services market, allowing the establishment of foreign-controlled joint-venture banks, securities companies, and asset management firms. In January 2024, the National Financial Regulatory Administration announced further measures to open up the financial sector, lifting restrictions on foreign shareholding in financial institutions and reducing the investment threshold for foreign investors. Additionally, the State Council issued Steadily Promote High-level Opening up and Make Greater Efforts to Attract and Utilize Foreign Investment (2024 Action Plan) on March2024 to expand foreign access in banking and insurance and promote pilot projects for qualified overseas limited partners.

China’s growing middle income groups and accumulating national wealth have spurred demand for asset management services, making the market increasingly attractive to foreign firms. According to the 2023 China Private Wealth Report, the number of high net-worth individuals in China reached 3.16 million in 2022, with investable assets totaling 101 trillion yuan. This wealth growth, coupled with the improving financial openness, provides favorable conditions for foreign asset management firms to enter the Chinese market.

Current Participation of Foreign Firms

Foreign asset management firms participate in China’s market through two main avenues: investment funds and capital investment in local firms.

Investment Funds: Foreign firms invest in China's capital markets through multiple channels such as Qualified Foreign Institutional Investors (QFII), RMB Qualified Foreign Institutional Investors (RQFII), Stock Connect programs, Bond Connect, and Cross-border Wealth Management Connect. For example, as of February 2024, 810 overseas institutions had obtained QFII qualifications, with significant participation from China’s Hong Kong, the US, and the UK. By the third quarter of 2023, QFIIs held shares in 763 listed companies, with a market value of 138.201 billion yuan.

Capital Investment: Foreign firms also establish or invest in local asset management companies.(see Figure 1) By March 2024, there were 111 Sino-foreign joint-venture and 45 wholly-foreign-owned asset management firms in China, including 34 wholly-foreign-owned private equity fund managers (WFOE PFMs).

Public fund management companies have become a key form of participation due to their dominance in managing national social security funds and involvement in personal pension systems. By the end of 2023, there were 9 foreign-owned public fund management companies in China.

Operations and Strategies

Foreign firms have adapted to the local market by integrating their business practices with local conditions. For instance, the bond market