More major reforms on the way for China's asset management industry
Updated: 2013-01-23 07:09
(HK Edition)
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A well developed financial infrastructure is a must for any real economic powerhouse in the world. China may have very good "hardware" in some sectors, which have helped to build the country into the world's second largest economy, but it certainly lags far behind in terms of financial reform. During the past decade, most efforts have been made in the banking industry while other parts within the sector, including insurance or asset management, have been largely underdeveloped. Recent China Securities Regulatory Commission's (CSRC) moves indicate more changes may actually be on the way.
In late December 2012, CSRC published the Interim Provisions on the Development of Public Securities Investment Fund Management Business by Asset Management Institutions (Draft for Comments). According to the draft, securities firms, insurance asset management companies and private securities fund management institutions legally established in China may apply to the CSRC for public fund management business development if they meet certain criteria.
We think the new measures represent a major reform of China's asset management industry. As of December 30, 2012, there were 70 public fund management companies with a net asset value of approximately 2.66 trillion yuan in China. In the past few years, the public fund sector did not make much development with asset scale mired in stagnation, given the poor performance of the equity market, high degree of homogenisation for public fund products and limited number of marketing channels for fund houses. After the removal of public fund licence limitation and protection, fund houses, brokerage firms, insurance asset management companies and private fund institutions that meet the qualifying criteria will be able to raise securities investment funds publicly in the future. Looking ahead, China's asset management industry will enter a phase of major reform. Institutions' capabilities in investment research and sales will be the determinants of their ongoing development.
The new measures will bring in actual benefits to insurance companies and should open up new business sources for them. From experience in other nations, asset management and risk protection are the two key functions of insurance companies. In the past, China's insurance asset management companies were mainly responsible for the management of insurance premium income. Their asset management role was not fully exploited. Given the slow premium growth across the sector, the relaxation of public securities investment fund limitations will usher in new capital and income sources. Compared to the existing public fund companies and securities companies, large-scale insurance companies are at an advantage in terms of research capability, marketing channels and product design. Their asset scale looks set to increase rapidly through the offering of public fund products.
Although the new measures should benefit securities companies, the short-term effects on them are weaker than those on insurance companies. After the lifting of limitations on securities companies' asset management business, brokers may expand their assets under management (AUM) quickly through channel operations. The new measures may further lower the bar for investors of brokers' asset management business and widen brokers' issuing channels, but these should have limited direct stimulation to their asset scale in the near future given brokers' own limitations on research and sales capabilities. After the implementation of the new measures, the competitive advantages of large brokers with stronger research capability will become more apparent.
There will also be some impact on the existing public fund business and brokers' commission income may decrease in the short run as a result. They need to speed up the transformation process and quicken the development of research services for insurers and private fund institution.
The author is executive director at BOCI Securities. The opinions expressed here are entirely his own.
(HK Edition 01/23/2013 page2)