Foreign fund companies
face high expense,
lack of control in
China after WTO entry
INTERNATIONAL fund firms in the United States and Europe have long been jostling to find partners among China's fledgling asset-management and securities industries, with hopes of turning those informal relationships into real joint ventures.
Through these, the foreign companies hoped to gain access to some of the $600 billion invested in the Chinese stock markets, not to mention the hundreds of billions stashed away in bank deposits, state pension funds and social security coffers.
With China entering the World Trade Organization in December 2002, joint ventures between Chinese and foreign fund-management companies were expected to get a boost. However, new draft regulations for Sino-foreign fund-management joint ventures have yielded several unwelcome surprises for foreigners, disappointing some international fund houses and industry watchers who had hoped for better things to come from China's joining WTO.
Under the proposed rules, foreign fund companies can choose between a costly process to form a joint venture, or a time-consuming one. In both cases, foreign parties would have less control than they had previously hoped. The regulations, released in December 2002, stipulate that foreign-fund companies have two ways of establishing a joint venture. They can buy a 33 percent stake in an existing domestic fund-management company, which could increase to 49 percent in three years. Or they can form a new joint-venture fund-management company with an existing domestic securities or trust and investment company, with the foreign company owning an initial 33 percent stake, paid for in cash.
Almost all of China's 15 domestic fund-management companies have formed so-called technical cooperation agreements with at least one foreign fund partner. But the new draft regulations don't offer the option of foreign companies setting up new, separate joint-venture fund-management companies in partnership with a domestic fund firm. If foreign partners opt to buy the 33 percent stake in their fund-management partner in cash, they face the possibility of paying a hefty premium. In other words, the foreign partner can't just set up a small, minimally capitalized, clean fund manager. It has to buy into something that's managing maybe $1 billion in assets and is quite profitable, which will be expensive. Meanwhile, publicly traded foreign fund companies will have to convince shareholders that it is safe paying cash for a stake in a company they cannot control. And as with all purchases of minority stakes, companies are taking the risk of also buying into their past liabilities. This second option, allowing foreign fund companies to set up separate fund-management joint ventures with securities companies or trust and investment companies, would be time-consuming and also less than ideal.
As tapping into a new market always faces significant risks and obstacles, the potential benefit of a successful breakthrough is also substantial. Although foreigners may need to pay a premium for their 33 percent stake in their partners' company, a fair price could still be attained.
Liming Guan is an assistant professor of accounting at the University of Hawaii at Manoa College of Business. Reach him at Lguan@cba.hawaii.edu