For U.S. mutual fund marketers, China is the Holy Grail. Given the country’s fast-growing economy and its large and rapidly aging population needing to save for retirement, China’s fund market has enormous potential for growth. ¶ Although the fund industry started in China only a decade ago, funds in that country already hold close to $350 billion in assets. And given the expanding size of China’s economy, its fund assets could easily grow to several trillion dollars over the next decade. ¶ But the Chinese market has been tough for U.S. firms to break into, because both regulation and local preferences tend to favor homegrown funds over U.S.-sponsored offerings. In general, China encapsulates the difficulties that investment managers must address when trying to export mutual funds — one of the United States’ most successful financial products — to other countries.
The first obstacle fund managers face when looking to enter the Chinese market is regulation. Because of Chinese restrictions, managers can’t just take a fund already being sold in the United States and offer it to Chinese consumers. That’s because China uses national treatment for investment funds, requiring that all funds register with regulators in the country and comply with local rules. Since it’s very tough for funds to be registered in two countries at the same time, funds registered in China are sold only in China.
To be fair, most countries — including the United States — have a national treatment regime. There’s simply not enough international agreement on taxation and requirements for investor protection to allow for its alternative, called mutual recognition, to be broadly implemented. In fact, mutual recognition has taken hold only within the European Union and in a few emerging-market countries that allow European mutual funds to be used in retirement plans.
In consequence, most mutual funds are sold solely within the borders of a single country. Fund managers who want to go global usually do so by registering multiple versions of the same fund, often referred to as clone funds, in each of the countries it wishes to enter.
To protect its own markets, China has gone further than national treatment and placed two additional limitations on foreign entrants. First, to encourage the development of a homegrown fund industry, it requires that all fund sponsors be majority-owned by Chinese companies.
Therefore, the only option open to U.S. firms is to acquire a 49 percent (or lower) stake in a joint venture with a Chinese company. Many fund managers haven’t been thrilled by the prospect of being a junior partner — and possibly losing control over products and services — and have decided to pass on China for now.
Others see value in working with a Chinese partner who can provide local knowledge and, even more important, connections to distributors. Today, 41 of the 73 mutual fund management companies registered in mainland China are joint ventures with foreign firms, a roster that includes four of the top 10 fund complexes in the United States.