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      Chinese financial services giants spend a week in Luxembourg: what each side learned

      Chinese financial services giants spend a week in Luxembourg: what each side learned

      The Chinese may have a reputation for «inscrutability» but this was not on show at the China seminar held on 17 September at the Luxembourg Chamber of Commerce. The workshop, which marked the end of a week-long visit by senior directors from 11 of the largest custody banks and asset managers in China, was a master class in transparency, with frequent outbursts of laughter and comments from the speakers on “how not to do it”.

      Foreign companies were left with a clear message: there are opportunities in China but don’t think you will get by with a sleek presentation: “If you are interested in doing business, you must know Chinese laws and regulations and figure out whether you can meet these standards. 

      Then come to the table” noted one of the speakers. Where custody work is concerned “asset security is the top priority”. Lack of transparency in presentations concerning the downside scenarios is a show stopper – though they may not tell you this.

      The event, which was organised by Luxembourg for Finance, Ernst & Young and BNP Paribas, provided a unique opportunity to meet the cream of Chinese financial services companies in one place: Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Industrial Bank, HFT Investment Management, Pin An Asset Management, Invesco Greatwall Fund Management, PICC Investment Holdings, DaCheng Fund Management, UBS SDIC Fund Management and China New Life Asset Management.

      These firms are competitors in the area of fund custody, asset management or life insurance.  Notwithstanding, there was a moment that felt distinctly familiar to Luxembourgers when Mr Zhou of Industrial and Commercial Bank of China said of his fellow Custody panelists: “We are all good friends, actually. Custody is a new business and we need to cooperate”.

      The seminar opened with three presentations on the custody market, the asset management industry and the insurance asset management industry.

      The Custody market

      ZHOU Yueqiu, General Manager, Custody Department of Industrial and Commercial Bank of China, explained how the custody market has developed in just 13 years: the first related legislation was passed in 1997 and by June 2010 a total of 16 Chinese banks - almost all the national commercial banks – had obtained the custody qualification.

      Five foreign banks have also qualified: Citi, HSBC, Standard Chartered, Deutsche Bank and the Development Bank of Singapore. Meanwhile, assets under custody (AUC) at the 16 Chinese banks alone rose from 10bn RMB in 1998 to 7,290bn RMB at June 2010. 

      Mr Zhou remarked that Chinese banks typically offer a wider range of “core services” than western banks, and that added value services are not much in demand. Fees are typically based on NAV rather than charged for particular services.

      Mr Zhou gave a thorough briefing on the QFII (Qualified Foreign Institutional Investor) and QDII (Qualified Domestic Institutional Investor) markets, presenting the current status and outlook for these sectors.

      Fund management

      Mr YAN Xiao Qing, Deputy CEO of HFT Investment Management, presented the fund management industry, which like the custody market has developed extraordinarily quickly. In 1996 there were 78 closed-ended funds with the equivalent of just USD 794m under management (AUM). 

      A law regulating the investment management industry was passed in 1997, followed by open-ended fund regulation in 2001 and a law on the listing of funds, ETFs and pension funds in 2004. The first QDII fund was launched in 2006. As at June 2010 there were 61 investment fund companies operating in mainland China, of which 35 were joint ventures. 

      At the same date, 618 mutual funds held net assets of 2,125 billion Yuan (up from 59 funds and 83.8bn in 2001).  The concentration ratio is very high, with the top 10 companies managing 50% of assets. Mr Yan pointed out that with a country as large as China distribution and investor education were key concerns.

      The big retail banks wield enormous distribution power, especially ICBC, CCB and BOC, making a high barrier of entry. Companies have literally thousands of salesmen and the distribution of literature can be challenging: horses have been used in some inaccessible areas. 

      Since most asset managers are independent of the banks, a vibrant 3rd party distribution industry has already developed with all the challenges and questions that this presents at point of sale. New money is typically invested in new fund launches and equity funds account for 54% of the market. 

      Index funds are gaining market share fast, with 14% of AUM in June 2010. The 35 joint venture asset management companies, many of which have a minority foreign shareholder, account for 343 funds and 46% of AUM.

      Insurance asset managment

      Mrs CHUNG Yuet Ming of Ping An Asset Management presented the insurance market. Ping An is one of just 9 licensed insurance asset management companies (IAMCs), which between them manage 85-90% of assets in the insurance sector.

      Today, China is the 7th largest insurance market in the world (7th in the life sector and 9th in the P&C sector). Both density and penetration are low and there is huge upside potential. 46 foreign insurance companies have entered china through joint ventures, but the market is so far highly concentrated: the top 10 players account for 80% of premiums and the top 3 for 60%.

      Bankassurance is growing and accounts for 51% of the market. At present, business is concentrated in the top 5/32 regions, adding further potential for companies that manage to distribute outside these populations. 

      51% of AUM are held in bonds. Although recent changes to the investment restrictions allow (among other things) for foreign investment, IAMGs are using just 16% of their total QDII allocation (USD 100bn) because there are enough opportunities in the domestic market.

      Looking ahead

      The presentations were followed by two lively panel discussions involving of all the Chinese companies present. The subject of the global financial crisis was inevitably raised. The direct impact on financial markets in China was limited, since little client money is held overseas.

      However, consumer confidence was affected and money was switched from investment funds to savings accounts, so that AUC decreased. The capital market has been recovering since 2009. Mr GU Lin of Bank of China pointed out that “Everything has two sides”: the crisis had had several beneficial effects, in that it raised consumer awareness and firms were stimulated to rationalise their business. 

      Mr Zhou reminded his listeners that the Chinese word for “crisis” is a composite the words for “crisis” and “opportunity”. “The opportunity is bigger than the crisis” he said, adding as a concrete example that the Government had been keen to boost business: “We had our custody license approved in 2008, after a long wait.  The crisis created opportunities for everybody”.

      Another discussion revolved around joint ventures. “Neither side must dominate the other”, said HUI Yee Ming of Investco Greatwall Fund Management.  Chinese companies will honour what is in the contract and this means that they will be looking at the attitude of potential partners. “I need to feel that you have my interests in mind”, said Ms WANG Wen Yi of Ping An Asset Management.

      Jean-François Fortemps of BNP Paribas explained how the firm had put its QFII license into a corporate investment vehicle : since 2003 this fund has been distributed internationally, giving European and Latin American clients direct access to Chinese shares. The company now dreams of distributing Luxembourg funds in China.

      Members of the audience were also interested to learn about the ambitions of Chinese companies abroad.  The response was clear: custodian banks would ideally like to accompany their clients as they extend overseas.

      For Luxembourg companies in the audience, feedback from the Chinese delegation was very positive. Delegates were “in awe” of Luxembourg’s transformation into a global financial centre and the sheer scale of this achievement. 

      “This is a lesson for us”, said Mr HUO Jian Sheng of Industrial Bank.  Luxembourg was praised for its innovative spirit, for being “safe, convenient and efficient” … and for its natural beauty. “It is very quiet”, commented Mr GU, “but underneath is the power.” ER