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Global Research 4 April 2018
Q-Series
Chinese Financial Services Sector
US$7.5trn Oasis or Mirage (Part I: asset managers)
China lifting foreign ownership caps: what does it mean for asset managers
Deregulation could unlock substantial opportunities—we estimate the opening of the
Chinese asset management and securities sectors could expand the mutual fund
management fee pool five-fold by 2025, with AUM potentially reaching US$7.5trn. The
November 2017 announcement that China is lifting foreign asset managers and
securities companies’ shareholding caps (confirmed at the National People’s Congress
in March) potentially represents an important step towards full liberalisation—though
many other factors will also be important (eg, MSCI inclusion, capital controls). While
the pace of liberalisation is far from certain, the opening of these sectors will present
the single largest growth opportunity for global firms. We focus on asset managers in
this report and will take a closer look at securities firms in Part II of this series.
Much room for foreign asset management and securities firms to expand
Foreign asset managers have minority stakes in 19 of the top 30 mutual fund firms and
their recent Wholly Foreign-Owned Enterprise (WFOE) licence applications for private
funds suggest appetite for growth and control. We estimate mutual funds accounted
for less than 5% of household financial assets and held about 11% of free float in the
A-share market, now the second-largest globally, with average daily turnover of
US$80bn. Foreign securities firms currently have a market share of less than 2%, partly
due to the investor mix (85% retail investors).
Our Oasis scenario suggests potential US$7.5trn of mutual fund AUM by 2025
For asset managers, our Oasis scenario (further deregulation and market discipline)
suggests mutual fund AUM could reach US$7.5trn by 2025 (almost half the current US
level). This could expand the management fee pool five-fold to US$42bn (interactive
model). Entry of foreign asset managers could also expand the addressable market for
foreign securities firms and support institutional brokerage growth. A hypothetical
market share of 30% for foreign asset managers would imply incremental revenue of
US$10bn. The opportunity would be much smaller if foreign competition brings price
competition or accelerates the shift from active to passive asset management (eg, ETFs).
Implications for global asset managers and Chinese securities firms
Foreign asset managers (eg, BlackRock, Franklin) and brokers (eg, Morgan Stanley,
Goldman Sachs) with an established Asian presence are well positioned for the
opportunities. Chinese brokers with strong asset management units and an institutional
franchise (CITICS, Huatai) are likely to fare better than retail-reliant peers (Galaxy).
Equities
China
Financial
Kelvin Chu, CFA
Analyst
kelvin.chu@ubs
+852-2971 7397
May Yan
Analyst
may.yan@ubs
+852-2971 7157
Michael Werner
Analyst
michael.werner@ubs
+44-20-7568 8086
Brennan Hawken, CPA
Analyst
brennan.hawken@ubs
+1-212-713 9439
Saul Martinez
Analyst
saul.martinez@ubs
+1-212-713 2491
Daniele Brupbacher
Analyst
daniele.brupbacher@ubs
+41-44-239 1493
Jason Napier, CFA
Analyst
jason.napier@ubs
+44-20-7568 5037
Lorraine Quoirez
Analyst
lorraine.quoirez@ubs
+33-14-888 3408
Kieren Chidgey
Analyst
kieren.chidgey@ubs
+61-2-9324 2820
Jason Bedford
Analyst
jason.bedford@ubs
+852-2971 8235
Xiaoyan Cui
Analyst
S1460513100002
xiaoyan.cui@ubssecurities
+86-213-866 8871
Sam Tang
Analyst
sam-za.tang@ubs
+852-3712 3578
Q-Series: Chinese Financial Services Sector 4 April 2018Contents
Executive summary .. 3
What does the lifting of the caps mean for growth and the competitive
landscape ... 5
Implications for global securities firms and asset managers .. 7
China to lift foreign shareholding caps in the financial industry11
Foreign asset managers: current involvement through minority stake in JV
and WFOE licence .. 11
Foreign securities firms are still tiny in China .......... 13
MSCI inclusion a potential catalyst for meaningful foreign inflows into the A-
share market.......... 15
Potential opportunities for market institutionalisation17
Shifting of investor mix, MSCI inclusion a catalyst .. 17
Normalising of market velocity ....... 19
Diversification of asset classes ........ 22
Potential deregulation ........ 23
Could competition drive consolidation .. 25
Sizing the opportunity for asset managers .... 30
Implications for US/EU securities firms and asset managers ...... 35
US asset managers . 35
US brokers . 35
US money centres .. 35
European asset managers .. 36
European securities firms and banks .......... 38
Comparative valuations ..... 41
Appendix .... 43
UBS’s Q-Series products reflect our effort to aggressively anticipate and
answer key investment questions, to help drive better investment
recommendations. Q-Series is a trademark of UBS AG.
Kelvin Chu, CFA
Analyst
kelvin.chu@ubs
+852-2971 7397
May Yan
Analyst
may.yan@ubs
+852-2971 7157
Michael Werner
Analyst
michael.werner@ubs
+44-20-7568 8086
Brennan Hawken, CPA
Analyst
brennan.hawken@ubs
+1-212-713 9439
Saul Martinez
Analyst
saul.martinez@ubs
+1-212-713 2491
Daniele Brupbacher
Analyst
daniele.brupbacher@ubs
+41-44-239 1493
Jason Napier, CFA
Analyst
jason.napier@ubs
+44-20-7568 5037
Lorraine Quoirez
Analyst
lorraine.quoirez@ubs
+33-14-888 3408
Kieren Chidgey
Analyst
kieren.chidgey@ubs
+61-2-9324 2820
Jason Bedford
Analyst
jason.bedford@ubs
+852-2971 8235
Xiaoyan Cui
Analyst
S1460513100002
xiaoyan.cui@ubssecurities
+86-213-866 8871
Sam Tang
Analyst
sam-za.tang@ubs
+852-3712 3578
Q-Series: Chinese Financial Services Sector 4 April 2018Executive summary
In November 2017, the Ministry of Finance indicated the foreign shareholding cap
for securities companies and asset managers will be lifted to 51% in the near term
and removed in three years. This was subsequently confirmed at the National
People’s Congress in March. This will be the second (and much more important)
deregulation related to foreign shareholdings in the securities industry since China
entered the WTO in 2001, the first being raising the foreign shareholding cap at
securities firms from 33% to 49% in 2012.
While the pace of liberalisation and institutionalisation is by no means certain and
indeed depends on many factors, the opening up of the Chinese securities and asset
management industries will represent the single biggest growth opportunity in the
sector globally. The question for global asset managers and securities firms is
whether the substantial potential growth opportunity is an Oasis or merely a Mirage.
In our view, the shareholding deregulation could accelerate the institutionalisation
of the A-share market (in which retail investors contribute 85% of transactions),
while upcoming MSCI inclusion will be another catalyst (5% weighting from June
2018). The potential larger presence of foreign asset managers in China would
also expand the addressable market for foreign securities firms.
In this series, we look into the scenarios of China market deregulation and
consolidation and examine the different implications for growth opportunities and
the competitive landscape. We focus on asset managers in this report and will take
a closer look into securities firms in Part II of this series.
In our Oasis scenario (full liberalisation, MSCI inclusion, institutionalisation, market
discipline), we expect China asset management AUM to reach US$7.5trn by
2025E, almost half the level in the US today. This could imply a five-fold increase
of the mutual fund fee pool to Rmb265bn (US$42bn) and potentially substantial
growth in the institutional brokerage commission pool.
Figure 1: Details of China’s plan to lift foreign shareholding caps, announced in
November 2017
Foreign shareholding cap Before After
Life insurance 50%* Lifting to 51% in 3 years; removing in 5 years
P&C insurance Opened since 2004 No change
Asset managers 49% Lifting to 51%, removing in 3 years
Securities companies 49% Lifting to 51%, removing in 3 years
Banks Single investor: 20%; total: 25%Removing the 20%/25% cap
State-owned AMCs** Single investor: 20%; total: 25% Removing the 20%/25% cap
*Exceptions include: AIA owning 100% in AIA China. **The four state-owned AMCs are: China Orient AMC,
China Cinda AMC, China Huarong AMC, China Great Wall AMC.
Source: Xinhua News, China Insurance Regulatory Commission, China Securities Regulatory Commission
Foreign asset managers have minority stakes in 19 of the top 30 mutual funds in
China, typically partnering with domestic commercial banks. We think the recent
WFOE licence applications by foreign asset managers indicate their growth
appetite and preference for greater control. The lifting of the foreign shareholding
limit in mutual fund companies should be appealing to many of them. We
estimate mutual funds account for <5% of household financial assets in China and
own only around 11% of A-share free float. The AUM of mutual funds in China
(excluding separate accounts and private funds) is around Rmb12trn (US$2trn); we
estimate equity investment accounts for about 20% of AUM, with the rest from
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