Asset Management CEO Says Tightened Rules Good for Mutual Funds
(Hong Kong) — China’s asset management industry is in the throes of transformation as it continues its rapid growth.
China is set to become the world’s second-largest asset management market by 2019, according to a November report by consultancy Casey Quirk & Associates LLC. The country’s A-shares will be included in the MSCI’s emerging-markets index this year, and exchange-traded funds are expected to be added to mainland-Hong Kong Stock Connect programs by the second half of the year.
At the same time, the industry is facing renewed scrutiny by mainland authorities trying to overhaul the country’s fragmented financial regulatory framework.
In July, China’s central government created a new cabinet-level body, the Financial Stability and Development Committee, to curb risk in four areas, including asset management products. In November, regulators issued a draft of the country’s first unified rules for its asset management industry.
Caixin recently spoke with James Sun, CEO of Harvest Global Investments Ltd. (HGI), on how these changes could affect investment flowing between China and the rest of the world. HGI is a subsidiary of Chinese asset management company Harvest Fund Management, which in September became one of the first six firms allowed by China’s securities regulator to offer fund-of-funds products.
Below are some excerpts from Caixin’s conversation with Sun. The interview, which was conducted in Mandarin and English, has been edited for length and clarity.
Caixin: Considering MSCI’s decision to include China’s A-shares in its emerging-markets benchmark, what developments do you expect to see in the asset management industry?
Sun: The MSCI inclusion is a “trigger” event. In itself, its initial implementation might not create an absolute large-scale inflow of investment into China. But it will fire up overseas investors’ interest in looking at China’s economy and investment opportunities within China. Then we will gradually see more and more assets being allocated into China.
This kind of allocation is also being strengthened by the various Hong Kong “connect” programs, the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, and the Bond Connect plan. China’s debt market is also a huge market. But this huge market, within the global context, has a very low level of asset allocation; (after the MSCI inclusion of A-shares,) people will become conscious of how such a large market was ignored for such a long time.
What’s the impact of recently tightened mainland regulations on asset management?
I think the impact is largely positive. I’ll tell you why: Mutual funds — and Harvest is a mutual fund company, in a sense — are very well-regulated, and are the best regulated products in China. They have always been within the regulatory framework, and have always been looked at carefully.
Mutual funds will actually emerge victorious from this round of regulatory tightening. After many underregulated, nonstandard assets or projects are hit by this round of regulation, assets with a very clear framework, where the entire product system is very mature and transparent, especially mutual funds, will be the winners.
A big problem in China has been how rigid repayment has obscured the relationship between risk and returns. If my minimum-guarantee product already has very high returns, why would I want to invest in funds? Funds are more volatile. But once people know that rigid repayment is something that needs to change, and isn’t a normal situation, which is one of the core ideas of this round of regulation, to break down rigid repayment — once this is broken down, everyone will clearly understand that mutual funds are actually a product with a good balance between risk and return.
How have Swiss investors responded so far to Hong Kong products sold under the new H.K.-Switzerland cross-border trading plan?
This is a very meaningful issue. What we’re doing is “paving the road,” so to speak. There is a strong lack of European wealth being allocated to Chinese assets. For such a large economy, especially one that has developed so quickly, there are few specialized, tailor-made China-related products for Europe’s wealthy or private banks.
Switzerland is the wealth management center of the world. Hong Kong is the asset management center — a global one, in Asia. So, this program is actually connecting Europe’s wealth management demand with Hong Kong’s asset management assembling capability. That’s why we think this is a very meaningful thing. Europe and China are reconnecting, or connecting more strongly, on many levels, including through the “Belt and Road” initiative. The Belt and Road is the new “Silk Road” connecting China and Europe, and the old Silk Road was also a connection between China and Europe. I think the Europeans realized they should have a piece of investment in China.
But it is definitely a relatively long process because the entire channel hasn’t been built yet. The process of establishing this channel will take time. Everyone needs to climb the learning curve, especially the distributors in Switzerland.
The demand is there, and is very clear, or we wouldn’t be doing this. But we are currently looking at how to find the appropriate channels for this demand, and then what kinds of products will fulfill this demand.
What are typical misconceptions foreigners have about investing in China, and that Chinese investors have about investing abroad?
I lived in New York for 10 years, and now I live in Hong Kong, so I have many American friends. Those among the American investment community who are the most negative about China are often the ones who have never been to China. But once Americans come to China and see what’s happening in China, how China’s economy operates, once they see China’s new economy and the progress in various aspects of technology ecosystems, they start to understand it. And then that misconception disappears.
That’s why I say to overseas investors, the easiest thing for you to do is to climb over that “wall of worry” and come here and take a look.
When it comes to a lack of allocation abroad, Chinese investors also have to some degree a lack of knowledge and a lack of understanding. It’s because investors from every country in the world all have a “home bias.” They invest in something that they understand. If they don’t understand it, they don’t put their money in it. There’s nothing wrong with that — that’s how it should be to begin with, and that’s why Chinese investors prefer to invest in Chinese products. But once China’s wealthy have matured to a certain level, they naturally develop a demand for overseas allocation of investment.
I have a saying: “China alpha, global beta.” For overseas institutional investors, China as an inefficient market actually has many alpha opportunities. Elsewhere in the world, there are no longer so many such opportunities. In mature markets, in efficient markets, it’s hard to find alpha opportunities. But their beta is very well-packaged. It’s very well-represented.
You helped HSBC establish its private banking business in China. How has the situation for private banking in the country changed since 2008?
That was such a long time ago. (Laughs.) If I recall correctly, it has already been 10 years. So, in these 10 years, there has inevitably been change in this area. The biggest change is that the population of wealthy Chinese has experienced an extremely large expansion. But where things have remained relatively the same, where we’re still facing the problem we faced 10 years ago, is that China’s wealthy population doesn’t have sufficient diverse and multilayered products for them to allocate their wealth to.
The programs currently being spearheaded by Hong Kong, including the Shanghai and Shenzhen Stock Connects, the Bond Connect, and the future ETF (exchange-traded fund) Connect, will integrate the Shanghai, Shenzhen, and Hong Kong stock markets. In the process of this integration, you enrich the options of China’s investors, especially of China’s wealthy.
This is also very beneficial to overseas investors because they are familiar with the Hong Kong market. The Hong Kong market has very well-established norms, so overseas investors are fully able to invest in China’s new economy through the Hong Kong market. At the same time, this is a good thing for Chinese enterprises and China’s wealthy population. New-economy enterprises benefit from access to Hong Kong’s global financing platform. At the same time, Chinese investors, understanding the situation of these companies, can invest in these companies’ Hong Kong-listed units, enriching the diversity of their assets.
Wealth management is actually distribution, while asset management is providing products and content. So I’m connecting the content with the distribution. That’s what I’m doing. Connecting asset management, what I’m doing now, with wealth management, what I’ve done in the past.
Contact reporter Teng Jing Xuan (firstname.lastname@example.org)
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