The decision to allow China’s commercial banks to set up fund management companies set off alarm bells throughout the industry. The banks had a stranglehold on fund distribution so what was to stop them promoting their own products over those of the competition and taking over the market?
Three years on, Industrial and Commercial Bank of China, Bank of Communications and China Construction Bank (CCB) have set up joint ventures with Credit Suisse, Schroder and Principal Financial Group respectively.
But the fears of industry dominance have failed to materialize. A 2007 study by McKinsey & Company found that commercial banks were responsible for 54% of mutual fund sales. Yet the performance figures for that year show the three joint ventures had a collective market share of just 4.4%.
Indeed, Rex Auyeung, Asia CEO of Principal International, claims that CCB-Principal Fund Management’s ties to CCB don’t result in any kind of special treatment.
“Whatever we launch, the CCB branches look at it like any other company’s product,” he said. “We still have to go through all the same explanations as to why it will sell.”
Auyeung believes the established domestic fund management companies have built up such a strong pedigree for equity products that the banks have little hope of supplanting them. This view is echoed by Peter Alexander, principal of fund management consultancy Z-Ben Advisors.
“The argument that commercial banks are going to be able to convert their army of tellers into an army of sales people is not a realistic one,” Alexander said. “One of the best outcomes for us in terms of how well fund managers have done is that when it comes to investment there is only one place you go – to a fund manager.”
Fund management firms are also largely free of the stories of financial misbehavior that still haunt the nation’s banks. Aware that millions of people would be placing their savings in the care of the mutual fund industry, the regulators try hard to keep it clean.
As a result, fund management firms operate with a degree of transparency unseen elsewhere in China’s financial sector. Companies must publish quarterly reports detailing their performance while comprehensive prospectuses accompany each new product.
“It is a very well regulated industry,” said Leo Lei, a fund manager at Fortune SGAM.