The Economist - USA (2020-11-13)

The EconomistNovember 14th 2020 Special reportAsset management 11

2 and liquid markets that are also inefficient,” says the boss of one
European fund. Many of the same conditions are found in other
parts of emerging Asia. A secular fall in inflation in India, the other
Asian giant, has encouraged the well-off out of inflation hedges
like gold and property into the stockmarket.
China appears to want to graduate from a rickety system in
which state-backed banks decide who gets capital. Its regulators
plan to establish a professional class of asset allocators. They see
foreign involvement as a means to this goal. Since 2018 foreign
firms have been allowed to take majority stakes in asset-manage-
ment joint ventures with domestic banks. From April this year,
they have been permitted to set up wholly owned subsidiaries in
China. Within days of this rule change, JP
Morgan Asset Management paid $1bn to
buy out its minority partner. Others are
moving to take advantage of China’s open-
ing up. Still, most Chinese asset managers
have foreign partners. The foreigners bring
with them expertise in building portfolios,
trading, research, investment process, re-
cord-keeping and the management of
highly skilled teams. Their partners bring
customers and local know-how.
Everyone thinks that China will be a big
deal. But industry bosses are not confident
about how things will shake out in practice.
There are broadly three areas of uncertain-
ty. The first is how to acquire customers.
Some of the world’s biggest asset managers
became that way partly from having a cap-
tive market. They are often offshoots of in-

surance companies, retail banks or investment banks. A foreign

asset manager with no brand in China needs to find another way to

build the business. For some a tie-up with a local bank is a good fit.

Amundi is an offshoot of two European banks, Crédit Agricole and

Société Générale, from whose customer base they have built a for-

midable market share in France. It has a joint venture with Agricul-

tural Bank of China and another with Bank of China. These are

lenders with hundreds of millions of customers. It also has a joint

venture with State Bank of India, the country’s largest commercial

bank. From such strongholds, Amundi has accumulated an asset

base of €300bn across Asia.

But banks are not the only money doctors in China. Some rich-

world equity funds have emerged out of life-insurance businesses.

They essentially sold equity risk under the guise of an insurance

product. Something similar might yet happen in China. China Life,

for instance, has a sales force of 1.8m. The two tech giants, Alibaba

and Tencent, have mobile-payment platforms that are widely used

and trusted. These are potential launching pads for asset-manage-

ment businesses.

Very big, China

In 2013 Ant Group, an offshoot of Alibaba, created a fund for its cus-

tomers to invest the cash piling up in their Alipay mobile-payment

accounts. Within a few years it was the world’s largest money-mar-

ket fund. Vanguard now has a joint venture with Ant Group to offer

investment advice. It signed up 200,000 clients in its first 100 days.

The choice of distribution channel hinges on whom Chinese in-

vestors will ultimately trust. It is not mostly a matter of technology.

“People make a distinction between tech platforms and bank net-

works,” says Yves Perrier, chief executive of Amundi. “But it is a

false distinction because the way we bank in France is both human

and digital.”

A second uncertainty is how the industry in China will evolve.

The bet is that it will become more like America, a market in which

mutual funds have the muscle. But there is no guarantee of this. In-

deed, in recent months America’s stockmarket has looked a lot like

China’s: retail-led, noisy and informed by social-media fads and a

gambling mentality. China’s market might stay that way. Or the

market for pooled investments might be swiftly captured by index

and other kinds of low-cost products.

A third source of uncertainty is policy in China. It is friendly

now, but might not always be. “With distribution-driven jvs,

sometimes you lose control of the factory,” warns one industry big-

wig. That is not the only risk. The prospect of selling rich-world se-

curities to Chinese investors depends on China allowing capital to

flow freely outwards. It has been loth to do this because it would

mean ceding greater control of the yuan to

market forces. China may balk at further

opening up. A bigger question lies behind

this. One industry executive puts it bluntly:

“How serious is it about allowing people to

make money?”

Perhaps the trade-and-technology wars

will make China inhospitable to American

asset managers. Perhaps Europe has an ad-

vantage. If Shanghai is to follow London

and New York, the yuan must become free-

ly convertible. China has to be open. But

economic and financial hegemony may be

expressed differently. “Will we make mon-

ey? We haven’t a clue,” says the executive.

But like many of his peers, he sees China as

a low-stakes bet with a potentially large

payoff. “We still need to be there,” he says.

“So we are there.” 7

America First

Assets under management by region, $trn

2019

Source: Boston Consulting Group *Excluding Japan

Middle East

and Africa

Latin America

Offshore

Japan and

Australia

Asia*

Europe

North America

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