CHINA ROUNDTABLE: The price of going global

The Chinese asset managers at our panel are bullish about growth in their home market and are agreed on one thing it is expensive to expand in Europe. Chaired by George Mitton in Hong Kong.

Peng Fei (chief executive and co-founder Winsight Global AM), Wayne Shum (managing director, head of institutional business BOCHK AM)
Jelle Vervoorn (chief executive, HFT IM), Lambert Xu (director, head of business development, Bosera AM International)
Shelley Yang (managing director – international business, China Universal AM), Joe Zhou (managing director, CSOP AM)

Funds Europe: Recent data suggests Chinese economic growth has slowed, perhaps to its weakest pace in 24 years. What is your outlook for growth in China on an overall and sector level?

Peng Fei, Winsight Global Asset Management: The recent GDP growth number is 7.3%. It’s still pretty high, but compared to the previous trend, it has moved downwards. We have also seen disappointing PMI [purchasing managers’ indices] and CPI [consumer prices index] data that point to a slowing economy.

We need to understand what caused the current weakness in the Chinese economy. There are three traditional growth drivers: export, investment and consumption. All of these have issues because of the overheated economy, over-capacity problems, the strong renminbi and the global economy slowing down. But, there’s hope based on the government’s commitment to deepen financial and political reform. Now, people are talking about three new growth drivers: urbanisation, capitalisation and securitisation.

The current government is committed. We are moving in the right direction, so give us time and we’ll see progress.

Shelley Yang, China Universal Asset Management: I’m optimistic in the long term. The quality of growth is improving even though acceleration is normalising. In terms of sectors, we think healthcare and consumption will be the biggest drivers. Yes, everybody is claiming GDP growth is slowing down, but for such a great big economy, that growth is still enormous. We should not be fooled by the decreasing digits.

Wayne Shum, Bank of China HK Asset Management: Chinese GDP growth of 7.3% is still high relative to other developed markets. US growth is less than 3%, so there’s a significant margin between the two biggest economies in the world. We expect moderate but healthy growth in the future, which is quite normal for any economy that’s been through a period of high growth. 

Jelle Vervoorn, HFT Investment Management: You have to look at the relevant numbers – not only relative to previous years but also relative to the rest of the world. We must keep in mind the size of China. At 7% growth a year, what does it add to the global economy compared to the relatively low numbers in other areas? A tremendous amount. Sure, growth isn’t as high as it used to be, but in relative terms it’s still very high.

Lambert Xu, Bosera Asset Management: I want to look at this from a different angle. We were with the Chinese regulators last week and we found that around 94% of Chinese companies were not listed in China. When we’re with European and US investors, they ask how Chinese GDP growth can be so high but the stock market flat? It is because the real growth sectors in China have yet to be listed. GDP growth may be slowing down, but for the stock market, it is another story.

Joe Zhou, CSOP Asset Management: Right now the capital market in China is still not that mature. A lot of small enterprises have a good reputation in China and a good user base – such as some of the logistics companies – but they don’t have a way to get into the capital market yet. The CSRC [China Securities Regulatory Commission] recently proposed new rules that say companies don’t need to get pre-approval to be listed but need to get the filing. It sends a strong signal that the central government is trying to vitalise capital markets.

The other thing is that in November there was a rate cut in China, which happened sooner than everybody expected. The Chinese government knew they must do something and the data shows that they have the room to do something. Added together, this makes us sure the Chinese economy will keep growing.

Funds Europe: The announcement of the Shanghai-Hong Kong Stock Connect programme seems to have fuelled a short-term rally of blue-chip stocks. But what effect will this programme have in the long term?

Vervoorn: Whether it’s Stock Connect or the RQFII [renminbi-qualified foreign institutional investor] programme or any of the other schemes, the point is to provide access to the Chinese market. If you look today at foreign participation, it’s still very low. Every measure – whether it is Stock Connect or more RQFII quotas or mutual fund recognition – can be a catalyst for foreign investments into China. That can push the market up, especially in the short term but in the long term as well.

Fei: This is a milestone for China to open its capital markets. I’m not interested in the short-term impact. Chinese investors like to play on hot topics and that explains the short-term gains. The long-term impact is profound in terms of the improvements in the financial system, the legal system, the investment philosophy and adjustment to global standards. That is more meaningful than any rally.

Shum: I wouldn’t pay too much attention to the short-term market movements. I would look at this as a part of the renminbi internationalisation process. For foreign institutional investors, this is a supplement to what they already have under the QFII [qualified foreign institutional investor] or RQFII schemes. It is a positive step because it means there are more channels opening up that give access to the Chinese market.

Yang: This is part of a huge matrix of policies rolling out – part of the big plan of renminbi globalisation – and the start of the renminbi becoming a real reserve currency. Stock Connect will consolidate the market and make it open as a global standard. It’s an important milestone, but the short-term market movements probably won’t be remembered.

Zhou: This is a long-term thing. For sure, everybody saw that on the first day the northbound quota was quickly used up and the southbound was a little slow. But after several days we saw the balance between them. 

Chinese investors are mostly retail. They are more focused on small caps instead of big caps, so they are quite different from the Hong Kong market or international investors who are more long term. And if you look at Stock Connect you will see that it only benefits those investors who are more long term – that’s one of the reasons why there was an imbalance, especially when Stock Connect put a 500,000-yuan limit on southbound participation, which excluded many retail investors.

In the long run, if the policies stay the same, southbound flows will be limited. But as the Chinese economy gets more attention, northbound flows will still be popular.

Xu: Luxembourg funds could not initially have any Stock Connect allocation because the Luxembourg regulator, the CSSF [Commission de Surveillance du Secteur Financier], was concerned about this structure. In the coming months they may get approval. This is why, at the beginning, the flows were small, but after several months, foreign investors will become used to the structure and more allocation will come to China.

Funds Europe: The Chinese authorities plan to internationalise the renminbi. What effect will this have on investments in Chinese asset classes in the coming years?

Xu: For the internationalisation of the renminbi right now, we have two categories: exchange rate liberalisation and interest rate liberalisation. We don’t have an exact number, but we’re saying the policy has been a little revised. Right now, regulators face a problem. If they allow interest rate liberalisation, the whole economy may be affected, because the real rate in China could be higher and that would hurt the whole market.

Shum: There are three major steps in internationalising the renminbi: first, the currency needs to be used in foreign trade settlements, then it must be viewed as a place for storing wealth once people accumulate offshore renminbi deposits, and finally it must be recognised as a reserve currency. 

Talking about investments, a classic example would be the offshore renminbi bond market. It wasn’t an asset class until late 2010 after the relaxation of the restrictions. Since then, it’s gone from almost zero to around $100 billion. It took the US dollar Asian credit market 25 years to get up to $500 billion, so you can see this latest progress is significant. Total issuance this year up until July already surpassed the total size of last year and continues to go up.

Vervoorn: What we tend to do is look at renminbi deposits outside of China, but the next step is looking at who is holding those assets. To a large extent, it is still corporates, which use it as a trading currency. If you then link it to investments, what are the investment needs of that group? If it’s not equity, it’s just fixed deposits and maybe money market funds.

There is still a lot of education needed. To give you a personal example, when I went home to Holland a few weeks ago, my mum came and picked me up. We walked together out of the airport and the first thing we saw was a big advertisement that said: “RMB, Yes We Can.” I asked my mum, do you know what it means? She said: “I think it’s something Chinese.” And she is an investor. So there is still a long way to go in terms of education to encourage people to use renminbi as an investment product.

Zhou: I want to correct one term first – “internationalise”. The Chinese government never uses this term. Overseas media always use this term but, domestically, the Chinese government always uses the term “cross-border flow” for use of renminbi.

Yang: Internationalisation starts with the use of cross-border renminbi settlements. On the trading side, the majority of the trading is invoiced in US dollars. Fifty per cent is paid or settled in renminbi; that’s a small portion. Product-wise, investors need to enhance the yield by parking assets in deposits or money market funds at the beginning, then we’ll expand once people understand the market. 

Down the road, once we have enough invoicing and settlements, then will come the real volume. We see lots of RQFII quotas, lots of renminbi settlement centres outside China – all these market activities will accommodate and combine together with the investments. That will be a huge opportunity for China-related asset managers. China has its own capital market culture and you need to understand the market. That’s the space an asset manager can occupy. So far there is no real China-born, China-domiciled global player in the global market.

Shum: I want to throw some numbers out there: Hong Kong has close to one trillion of renminbi deposits, Taiwan has about 300 billion, Singapore is 160 billion, Korea is 80 billion, and the renminbi offshore centres in Europe have around 15-20 billion each. If you add these together, there’s a huge amount of renminbi sitting outside China looking for a place for investment. Now, some of them may be used for trade settlements, but a lot of those will stay in deposits because there’s a lack of investment products for them. That’s why when we brought the fund to Europe to talk to potential investors, they were interested.

Funds Europe: What challenges do Chinese asset managers face as they try to expand overseas – for instance, into Europe and North America? How can these challenges be overcome?

Zhou: We work with local players, such as Source in Europe. That’s one way to expand overseas. For other Chinese asset managers who want to do their own brand instead of relying on others, there’s still a long way to go. In the advert Jelle mentioned – “RMB, Yes We Can” – that doesn’t mean anything to people in Europe. If we put “CSOP, Yes We Can”, that wouldn’t work either – nobody knows what CSOP is. That’s a problem because we only enjoy a good reputation in China.

It’s hard to build up our presence in a short time and we need to invest a lot of time and people there to do our marketing and publicity. European regulators could send some strong signals that they welcome Chinese asset managers by organising some seminars, doing more marketing events and more roadshows for us, to get us started.

Shum: If you set up a local presence, that takes time and you don’t know whether it will be successful or not. We’ve partnered with Citibank and launched a fund and put the fund on their platform. It has opened the doors to all the institutions in Europe because through the connection, we are able to have access to these decision makers. So, this may be the fastest way to go. But, of course, the flip side is that you have to partner and then you have to choose the right partner and work out whether there will be an effective collaboration between the two.

Vervoorn: Having investment capabilities is one thing, distribution is another. Also, for Ucits funds and for international investors, they expect a slightly different approach to investing. You can’t just one-on-one translate what you do in China for the domestic market – you have to understand what investors are expecting.

Yang: Europe has a very sophisticated system. You have different sets of regulations in different countries.

Funds Europe: For Chinese asset managers, what are the benefits of launching Ucits funds domiciled in places such as Ireland and Luxembourg? And what are the disadvantages (for instance, cost)?

Shum: One benefit is the passportability in Europe. Once you’re registered in Luxembourg you can sell to any European market. It’s similar in Asia, because Ucits is well-recognised by some of the key markets here in Asia, such as Singapore and Hong Kong.

Because Ucits is highly regulated, there will be costs. Without partners, people trying to launch a fund in Luxembourg need to consider whether they have the knowledge. Maybe it’s a better approach to have your partners in Europe, who can take care of these things for you, and then you can focus on just the investment management of the fund.

Zhou: It’s something we also consider, but it’s a lot of money. The lawyers are expensive. Also, our management is worried about the time difference. Even if we base our investment management function in Hong Kong, we still have to have operations teams standing by 24 hours a day in order to run these kinds of funds in other places and to operate smoothly. Also, if you are doing an ETF [exchange-traded fund], there are the creation and redemption tasks, which need to be very efficient. It’s not just setting up costs but also maintenance costs.

Yang: We haven’t started yet, but we have explored the Luxembourg and Ireland options. We love the flexibility of Ucits in that it covers the majority of the market. The operational issues depend on whether you set up a very efficient fund like an ETF or a less efficient fund like an index fund. These are technical issues we need to consider – the cost, the efficiency, the operation, administration, and whether we have the distribution capability. In terms of Ireland versus Luxembourg, it’s a question of brand awareness. Luxembourg has more market share but Ireland is picking up. I agree the costs are very high, so we’re trying to provide a good product that can justify the costs.

Fei: My clients are mainly from China. I’ve been debating on where to register my funds, in Ireland, the Cayman Islands, Luxembourg or Hong Kong. Registering a fund in the Cayman Islands is cheap, relatively, but it cannot be accepted by the CSRC. They don’t recognise their regulation there.

Vervoon: In the long run, Ucits is supposed to provide you with the biggest distribution platform you can get. But the costs are relatively high and if you’re not successful those costs will be there for as long as the fund exists. For Ucits I would say, yes, it buys you a big platform to distribute, but if you don’t have your distribution in place, be careful, because it can be a big burden on your organisation.

Funds Europe: Which overseas markets will generate the most inflows for Chinese asset managers in the years ahead, and what asset classes do investors in these regions want to own?

Shum: Asia has already started. The next would be European investors. I think they will be faster than the US. In terms of the asset classes, it depends, because the markets are very restrictive. You need to have an RQFII, QFII quota or go through the Stock Connect. As China has not fully opened its capital market yet, the offshore market will continue to be important.

Fei: The US is more conservative compared to the European investors. They have very rigorous criteria. To be screened by their procurements is difficult for Chinese asset managers.

Vervoorn: I will go with the same sequence. We tend to forget about Asia when we talk about the foreign investors into China, yet in my view Asian investors are by far the most important group at this point in time. Then it would be Europe, then it would be US. But there are game changers, like if MSCI adds Chinese A-shares to its Emerging Markets index.

Zhou: For me it’s a little bit different. In Asia, we have been working on this for quite some time now, and have established ourselves in this field. So if you are asking about our company strategy, we are more looking at the US for now.

©2015 funds europe



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