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Foreign Funds Gain Foothold In Chinese Market

by Mary Swire, Tax-News.com, Hong Kong

20 April 2007


Foreign invested funds have gained a rapid foothold in China, with market share reaching 39% in an industry with some RMB856 billion (US$111 billion) in assets under management at the end of 2006, according to a new report by KPMG and Reuters.

The report surveyed the experience of the foreign fund management joint ventures that have set up in China over the past four years.

However, the KPMG/Reuters survey found that foreign invested fund management companies are still being outperformed by domestic peers, which have achieved success through their close knowledge of local stocks and focus on short-term returns. As of December 2006, seven of the eight largest fund managers were domestic players and the one exception, Harvest Fund Management, was already China’s fifth largest mutual fund manager before Deutsche Bank took a stake in 2005.

“The interesting question will be whether the foreign-invested companies and joint ventures can demonstrate that their more risk-focused approach will yield better and more consistent returns over the long term,” says Tom Brown, partner, Financial Services practice, KPMG in UK.

The report, entitled 'China’s fund management joint ventures: The growing flow of wealth,' addresses a number of the challenges that the early joint ventures have faced. These include establishing effective distribution channels, hiring and retaining skilled staff and education of investors. These challenges will remain particularly pressing considerations for new entrants to the market, suggesting the early joint ventures may have achieved some first-mover advantage.

Drawing on interviews with fund management executives, the report also considers some of the lessons learnt in setting the terms of joint ventures. Most joint ventures have tended to insist on adhering to international standards for compliance and risk management, which may require the domestic partner to adjust to a more long-term view.

However, the more successful joint ventures have been those where there is mutual respect of each partner’s skills and attributes together with alignment of objectives and goals. Attempts to simply import and roll out techniques and strategies have not always proved successful, even if those strategies had worked effectively in other markets.

“Fund management was one of the first areas of China’s financial services sector to open up to foreign investors, when the first joint ventures were approved in 2002,” says Bonn Liu, partner, Financial Services practice, KPMG in China and Hong Kong SAR. “Assets under management have grown sevenfold since that time and predicted to continue at a rapid pace. It remains an area with huge potential for growth where companies with innovative ideas and products can succeed, but only by overcoming major challenges, many of which are unique to China.”

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, trusts and hedge funds is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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