The entire world has observed China with great interest over the last decade as the giant dragon that consumed and produced at rates that seemed too good to be true. This caution has come to bear in the past few years with significant market volatility and slowing economic growth. However, even with this economic turmoil the Chinese investor market poses a massive opportunity for asset managers.
Asset Management Is a New Industry and Is Expected to Grow
China’s GDP has surged over the last two decades and while the asset management has grown as well, it still only represents a fraction of the wealth within the country – only 3% of wealth was held in mutual funds in 2013.
Institutional participation is also expected to grow while the retail investor market begins to enter the purview of the asset management industry. This is signaled by the emergence of new institutional investors as well as a shift from pure cash saving to investing in other asset classes.
Figure 1: Historic and Projected Growth in Chinese Investable Assets Including Those Managed by Fund Management Companies[1]
Investors Seek Offshore Diversification
In addition to the institutional market which has already exhibited its search for international investment opportunities, the growing middle class in China is seeking offshore opportunities to diversify their portfolio. This has been driven by domestic capital markets volatility, an expectation of yuan devaluation as well as an increasing search for portfolio optimization. This is clearly demonstrated by the balance of China’s inflows vs. outflows over the last decade as seen in the figure below.
It’s estimated that US$590 billion moved out of China as of June 2015 with the expectation that this will increase into 2016. This trend has been most pronounced with the purchase of real estate, both commercial and residential, as well as a focus on the children of investors that are expected to study abroad and set up lives outside of China. This trifecta of domestic economic troubles, increasing investment sophistication and a trend of Chinese nationals moving abroad has and will continue to form a massive opportunity for asset managers.
Market Liberalization and Opening Regulations
However, the offshore investing has not been without its challenges. Historically, retail investors have had to purchase US dollars limited to US$50,000 and institutional investors have had their own restraints around freely diversifying their investments abroad.
Chinese regulators have recently taken efforts to ease these restrictions on outbound investments. Outbound investments by Chinese companies have historically required the prior approval of several government authorities in China. This has disadvantaged companies as it often forced a “China premium” that was associated with the perceived risk of regulatory uncertainty. Chinese regulators are working to simplify and relax this process.
Additionally, the ability to purchase foreign currency has taken a significant step forward with QDII2 which will allow investors with residences in certain pre-determined cities to purchase foreign currency so long as they meet certain criteria including a domestic ‘accredited’ standard of RMB 1.00 MM of net worth.
Furthermore, regulations for foreign investment companies to operate within China have been simplified and relaxed, allowing foreign asset managers to have better reach to tap into Chinese domestic investor capital.
China has long been considered the primary global economic force due to its sheer size and growth rates. However, it has long been an elusive target for asset managers with a high barrier to entry driven by cultural discrepancies and insurmountable regulatory hurdles. However, with Chinese outflow into offshore assets expected to hit US$20 Tn by 2020 it is an opportunity too large to be ignored.
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DarcMatter (“DM”) is a global fintech platform that streamlines the capital raising process for asset managers and provides investors with transparent and direct access to funds in the asset management industry.
DM’s mission is to enhance capital flow through fintech to create transparency and efficiency by providing direct access to funds in the Asset Management industry for Accredited Investors, Advisors, and Asset Managers.
