China faces significant securities infrastructure challenges despite rapid growth in the managed funds industry, while foreign investors continue to remain significantly underweight on China’s managed funds sector due to these constraints, according to a new report by State Street.
“While there is great interest in the offshore yuan market, much needs to be done,” said the report, China Funds Future, which was written by authors including Sau Kwan, senior vice president and managing director at State Street. “A trading and settlement infrastructure needs to be established, and a full range of products developed. The lack of liquidity is also seen as a major problem.”
China’s 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, said the report. ?Recent examples to adjust and revisit regulation include the China Securities Regulatory Commission’s (CSRC) June 2011 announcement 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. The report also highlights the unique role that Hong Kong has played as an offshore RMB centre for China while it takes steps toward liberalising and internationalising its currency. It notes that 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% from year-end 2010, according to the Hong Kong Monetary Authority.?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.?
“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.”
Reporting by: Janet Du Chenne, Global Custodian, an Asset International publication