Some of Wall Street’s most powerful financial institutions are stepping up efforts to strike deals in China even as relations sour between Beijing and the US.
BlackRock, the world’s biggest asset manager, last month received approval for a partnership with a state-owned bank in China. Days later, Vanguard, a rival asset manager, said it would relocate its regional headquarters to Shanghai, while Citigroup became the first US bank to receive a fund custody licence in the country. Details have also emerged of JPMorgan Chase’s plan to buy out its local partner in a Chinese funds business.
The new moves come as Beijing takes steps towards the liberalisation of its vast but heavily protected capital markets. They show that, behind the bluster of US-China tensions in the lead up to November’s presidential election, the two countries are edging closer in financial services.
“Everywhere you look [in China], there’s a lot of money, and where else in the world is there an opportunity like this to go and get that sort of money for management?” said Stewart Aldcroft, Asia chairman of Cititrust, an arm of Citigroup. “There isn’t anywhere, frankly”.
The recent wave of activity has focused mainly on the country’s fund management industry — part of a broader range of services that were deemed to present an opportunity for “co-operation and mutual benefit” in the US-China phase I trade deal published in January.
Chinese reforms that came into force this year mean that foreign companies can for the first time fully own their own businesses in the country’s rapidly growing mutual fund sector. According to a Deloitte projection, publicly registered funds could hold assets of $3.4tn by 2023.
Casey Quirk, a consultancy, estimates that China will overtake the UK as the world’s second-largest funds market by 2023.
“We knew China’s intention was to open up the market, and the reason they were doing that is not because they were being magnanimous,” said Peter Alexander, founder of Z-Ben Advisors, a Shanghai-based consultancy. Rather, he said, China wants to benefit from US “best practice.”
Mr Aldcroft cites a visit six years ago by senior officials at the China Securities Regulatory Commission to Citi and the SFC, Hong Kong’s securities regulator. “They see the competition foreign firms can bring to be a very healthy development,” he said.
China’s mutual fund industry is still in its infancy. Goldman Sachs estimates that just 7 per cent of the country’s household assets are in equities and mutual funds, compared with 32 per cent in the US. Two-thirds of Chinese households’ assets are in property, and nearly a fifth is held in cash and deposits.
Chinese stock markets are also wracked by volatility — an issue over which official state media has expressed concern this year, as indices have rallied sharply. Wild swings in prices have fanned fears among ordinary investors that the market can be treacherous.
“For us retail investors who don’t have professional financial knowledge, it’s hard to gain,” said Shen Jiahong, a Shanghai retail investor in her forties. Rather than buying individual stocks she mainly buys mutual funds, which she assesses based on rankings on WeChat, a messaging service.
Foreign firms’ interest is not limited to selling mutual funds. BlackRock recently received the right to wholly own its own mutual fund business, but its new partnership with China Construction Bank and Singapore’s Temasek will also allow it play a role in the country’s wealth management market, which is dominated by domestic banks. China this month approved Citi as the first bank offering custodian services such as record-keeping, trade settlement and income processing.
In March, Morgan Stanley received approval to take majority ownership of its China securities joint venture. JPMorgan was recently permitted to become the first foreign bank to fully own a futures business in China, on top of taking control of its Chinese mutual fund business through its asset management arm.
Jamie Dimon, the bank’s chairman and chief executive, said in a Bloomberg interview in Beijing in 2018 that his company is “building here for 100 years”.
“One day you’ll probably have a tower here that looks like the tower we have in New York,” Mr Dimon said.
Taking market share may not be easy. Hugh Young, head of Asia for Standard Life Aberdeen, said that international asset managers are up against some “entrenched” domestic competitors.
He added that many foreign firms are trying to cement their presence in the market in order to benefit from an eventual liberalisation of capital flows, when Chinese authorities relax controls on the amounts of money households and companies are allowed to move overseas.
Mr Alexander agreed that to “run Chinese money globally” is the “holy grail” for foreign firms — but that Beijing will not allow them to dominate in that process. “The Chinese are going to go out and buy someone,” he said.