China’s asset management industry at the crossroads

China’s asset management industry is at a turning point. It has seen tremendous growth in recent years, with more than US$580 billion in assets under management as of the end of last year, but more work needs to be done on improving its systems and legal structure before Shanghai can become a major international financial center like Hong Kong or Singapore.

That was the assessment of panelists at the 5th Wee Cho Yaw Singapore-China Finance and Banking Forum held recently in Shanghai.

Capital markets in China are struggling, according to Professor Anthony Neoh, a former chief adviser to the China Securities Regulatory Commission (CSRC), because of an emphasis on relying on the banking system to finance the real economy.

Capital markets are not performing the function of raising capital

Anthony Neoh

“It’s time to return to the capital markets to fund the real economy,” he said.

But China has pretty much put a lid on initial public offerings. There hasn’t been one in China since late 2012. The CSRC is working on improving listing procedures to weed out financially weak companies before allowing new IPOs to go forward.

“The problem is very serious because capital markets are not performing the function of raising capital,” said Neoh. “The situation has to be reversed as soon as possible.”

Opportunities

Neoh was speaking on the sidelines of the event, which was organised by NUS Business School’s Centre for Asset Management, Research and Investment (CAMRI).

NUS Professor and CAMRI Director Joseph Cherian sees a lot of opportunities for both domestic and foreign asset managers in China.

“But you have to navigate through the system. Whether it’s the regulators, the investors, the investment management community, there are challenges,” he said.

Improving fiduciary responsibility and anti-money laundering systems are two of the challenges he highlighted. But he does feel the industry is moving in the right direction.

One way to make Shanghai more competitive would be to allow it to become more internationalised.

That’s a challenge, according to panelist Peter Alexander, Managing Director of Z-Ben Advisors, because of what he calls a “global disconnect” between China and the international investment community.

“It’s funny – the foreign community – when everything looks great in China and they want to get in, it’s next to impossible to get in,” he said, citing obstacles like the difficulty of getting Qualified Foreign Institutional Investor (QFII) status or doing joint ventures.

“Then, all of a sudden, when it’s really easy to get in, like right now, the foreigners don’t want anything to do with China.”

Institutional money

China increased the QFII quota to US$150 billion in July. The quota was increased “primarily to bring more sophisticated institutional money to the Chinese market, stabilise it and make it a more attractive platform for capital market formation,” according to Professor Cherian.

And even that limitation could soon be lifted, according to Professor Neoh.

“QFII of course is largely operated through Shanghai. And I think in a few years’ time probably there could be direct settlements within the banks with the results that there’s no need for QFII, but probably control of foreign exchange volume through bank regulation,” he said.

Neoh said he believes that the problems facing China’s capital markets will sort themselves out eventually because the economy is fundamentally sound.

It is, he said, just a question of putting the right set of public policies in place to put the markets to good use.

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