Lu Xun, widely considered to be one of the greatest figures in 20th century Chinese literature, once observed, "As people are walking all the time in the same spot, a way appears." A way must, then, surely be appearing for the ever-increasing number of foreign asset managers trying to build a business in China.

Morley recently became the latest firm to announce Chinese ambitions. The UK asset manager has recruited Walter Lin, previously CEO of ABN Amro Teda Asset Management, to establish an asset management presence for Morley in China through a joint venture vehicle.

In asset management, as in many other industries, a joint venture vehicle is the only way into the Chinese market. Current Chinese regulations stipulate that foreign firms can own a maximum of 49% of a Chinese asset management company. Until 2004, the figure was lower still at 33%.

Establishing a JV presents foreign firms with numerous problems. It's a little bit like following Mrs Beaton's recipe for jugged hare: first you must catch your hare. Suitable JV partners are thin on the ground and increasingly in China, as elsewhere in the emerging markets, they know the value of what they have to offer.

"If you look at Central and Eastern Europe, people have paid a high price to establish these relationships," says Nick Griffin, a partner at KPMG. "Companies will insist on strong terms."

Mrs Beaton suggests you "skin, paunch and wash" your hare once you've caught it, but in JVs it's important to watch out that your hare doesn't skin, paunch and wash you. It doesn't always come down to money. The joint venture partner may insist on technology or knowledge transfer. "There's a risk in informing someone you don't own," says Griffin. "It's a double-edged sword."

Assuming you can find the right JV partner and agree terms, there are still a number of regulatory loops to go through. The foreign firm must have a minimum paid-up capital of RMB 300m (e29m) and the JV must have a minimum paid-up capital of RMB 100m (e9.7m). There are also restrictions on the funds launched by the JV, which must have at least 100 subscribers at launch and raise RMB 200m (e19.5m) within three months of launch.

Of course, as well as being a necessity for foreigners, JVs can bring many benefits for both parties. For the Chinese partner there is the advantage of the foreign firm's experience and expertise, and of the association with an international brand. Foreign firms also bring some stability to a company's ownership.

"They're not worried about short-term losses," says Lauren Yao, head of marketing at Fortis Haitong Investment Management. "They will allow JV companies three years to be profitable. Local Chinese investors are more short term and put pressure on management, which can hurt performance."

At Fortis Haitong, the management is conducted by Fortis and Haitong, a brokerage company, takes the lead in distribution. This model is by no means typical, however.

"More than half the JVs are controlled by the Chinese partner," says Yao. "Only a small portion is managed by the foreign partner. Often there is a clash between the two shareholders. In our company we are quite lucky. Haitong is more laid back."

This lack of control and these potential clashes, which Yao puts down to "cultural issues", are among the main scare factors for foreign groups setting up in China. A report prepared for KPMG by the Economist Intelligence Unit, Sino-foreign joint ventures in fund management: It takes two to tango, suggests they scare Americans more than Europeans.

"This restriction [the 49% rule] presents problems for those looking for full control of the joint venture businesses, in particular, the American firms, as they do not feel that they would be able to have complete command over the performance of their funds under this rule," the report says. "By contrast European houses seem to be less concerned about this rule, at least in the initial stage."

The plus side for foreign firms in JVs - and it's a big plus - is that they have Chinese people playing on their team. At Fortis Haitong there are no foreign staff. Language issues and cultural issues make foreigners something of a liability in China.

"A foreign person can't handle marketing and sales," says Yao. "We organise seminars with local people. The way you present is important. How will people see you as a credible person if you have a foreign face?"

Instead, the preferred beast is the Chinese person who has been educated, and has, perhaps, worked abroad. Denis Lefranc, deputy general manager of Fortune SGAM Fund Management, says part of his company's strategy to employ mainland Chinese with successful experience abroad in key roles such as COO and CIO. "You cannot import senior people from Hong Kong or Taiwan," he says. "Even Hong Kong Chinese don't know the Shanghai stock market."

Yao agrees that investment research in China requires a local eye. "You usually need to find out a lot of hidden information. It's not possible for a foreign person to do that," she says.

Dealing with the regulator, the China Securities Regulatory Commission (CSRC), which Yao describes as "very stringent", is also problematic for foreigners. "The authorities don't like to speak to some who doesn't understand their language," Yao says. "Even if you bring a translator, they can do it, but it's not what they prefer."

A Chinese JV partner isn't just a gloomy necessity then; it can be an invaluable asset. However, it's important to pick the right partner and here "hidden information" plays a role again.

First, you have to understand the political context in which you're operating. "If you assume politics is irrelevant to business the way it is in the UK or the US, you'll be in trouble," says Robert Lawrence Kuhn, senior advisor at Citigroup Investment Banking and editor in chief of China's Banking and Financial Markets: The Internal Research Report of the Chinese Government.

Politics is important in both a macro and a micro sense. On the macro side, it's important to understand that, while the Communist Party leadership is completely unanimous in how they view the growth and development of the markets, and funds are "in the strategic bull's eye of that", they are under pressure from local left-wing commentators. This can lead to regulatory decision designed more to appease those commentators than to facilitate better regulation of the market.

On the micro side, it's very important to know who you're dealing with, especially when choosing a joint venture partner. The leaders of companies are not appointed by boards of directors but by the organisational section of the Chinese Communist Party, and there are different factions within the Communist Party.

"It's important to do a constituency analysis of your partner," says Kuhn. "Who does it report to? Who is its patron? What is their political career likely to be like?"

This might sound rather Machiavellian, but Kuhn insists it is essential and a key point where foreign companies often go wrong in China. "It's a serious mistake to have a good company and not look at who the backers are," he says. "That's particularly true in asset management because it's so new."

How do you get this information? "You have to be in the system," says Kuhn. "You have to know friends who'll tell you the truth about the backers."

It's no wonder the KPMG/EIU report says, "Patience and persistence are critical to success in securing joint venture partners in negotiations."

Companies that have the requisite patience and persistence, and can find the right kind of JV partner in every sense of the word, will then be able to see if they can make any money. Fund managers may be piling into China, but distribution is still tightly controlled by a small number of banks. "Commissions are being rebated more and more," says Lefranc.

© fe April 2007