Asset management has risen to the top of most Chinese bankers’ agendas, given the surge in retail interest in the domestic stock markets, which gained 121% last year and are leading the world so far in 2007, despite a sharp correction in February.
The Chinese consumer has embraced A-shares: funds under management in the Chinese fund management sector leapt 83% in 2006 and crossed the RMB1 trillion-mark in January, according to Z-Ben Advisors, the Shanghai-based asset management research group. Almost all of the increase was in domestic equity products. “This trend has a profound impact on altering the industry landscape in China’s financial sector,” says Dorris Chen, analyst at BNP Paribas Peregrine in Shanghai.
Beneficiaries
Chen believes it works to the benefit of large banks and insurers. “Large banks will see easing of concerns about excess liquidity,” because the pressures of that liquidity are mitigated when a bullish stock market allows them to channel excess deposits away from the banking system and into the stock market.
But only the bigger banks stand to benefit since they are the ones with the mutual fund distribution capabilities. Chen estimates that new mutual fund issuance in 2006 generated RMB4 billion in fee income for domestic banks, and that’s really just the start.
Several domestic institutions have made strides in asset management on the product development side, too. New launches in 2006 included: a money market fund; a stable growth fund and an enhanced balanced fund from ICBC-Credit Suisse; an international sustainable growth equity fund and an international growth and income fund from BOC International; a money market fund and an enhanced growth equity fund from CCB-Principal; a stable allocation fund and an equity growth fund from Bank of Communications-Schroders; and a principal guaranteed bond fund from China Merchants.
JV Success
In a crowded field – there are 55 fund managers of one kind or another in mainland China, according to Z-Ben – the three bank-controlled joint ventures (JV) (for ICBC, Bank of Communications and CCB) underwent what Z-Ben principal Peter Alexander calls “a triumphant rise” in 2006.
“In their first full year of operations, each of the three ended up matching the expectations of the marketplace, gorging themselves on assets,” he says. “We initially had our reservations that the banks would be able to leverage their access to distribution to raise above average assets.”
But by the end of the year the three ventures held 28.4% of all assets managed by JV firms in China, he says. “Collectively, it is a near certainty that the group will further grab share away from their independent counterparts.” Other JVs, such as one between Agricultural Bank of China and Credit Agricole, are expected to follow.
The flipside of this is that smaller banks without distribution platforms stand to suffer as Chinese consumers stop putting every penny into the bank and instead push it in to the markets. Chen notes that banks like Minsheng, Shenzhen Development Bank and Huaxia Bank, all with high levels of gearing and a low proportion of retail deposits, should worry; “The loss of the retail deposit base can potentially threaten their ability to grow their loan book,” she says.
Chen reckons the various positive dynamics at work only really help a few banks, particularly China Construction Bank, China Merchants Bank and ICBC. (Macquarie analyst Christina Fok reckons Bank of China, Bank of Communications and CCB.) Either way, it looks to be a case of the big getting bigger.
Domestic asset managers themselves are unfazed. “Almost all the major banks have started their own asset management funds, and obviously they have a huge advantage on the channels, but I haven’t seen any significant impact on us or fund management companies like us,” says Frank Yao, executive vice-president and chief investment officer at Hua An Fund Management in Shanghai, one of the country’s biggest fund managers.
At Bosera, another of the country’s biggest asset managers, president Xiao Feng thinks the opportunity is plenty big enough for everyone. “In the next five years, the assets under management of the mutual fund industry will increase by another 50%,” he says. “When the whole industry is growing more and more, companies will have the opportunity to grow their assets.”
Bill Stacey, head of financials research for Asia at CSFB, thinks the future is all about people and costs. “You have seen very rapid cost growth and are now in a cycle of high loan growth and rapid fee growth. That’s an environment where a shock to any one of those parameters can lead to big challenges, where they will all have to cut costs and scale back a bit.”
“Finding the people to drive these businesses is the critical challenge,” he says. “People will see over the next few years there are huge differences in the quality of people in these institutions.”