Foreign institutions face stagnant growth in China

Macro-economic shifts and regulatory changes challenge asset management expansion.

Since China opened up its domestic financial market, global players have been focusing on wealth and fund management through collaborations and joint ventures. However, over the past three years, the overall assets under management (AuM) in China’s asset management industry have remained stagnant, with consumption and investment confidence relatively weak and a notable shift towards residential deposits.

Sandy Shi, Principal of Financial Services at Oliver Wyman, identifies the primary reasons for this stagnation. "From the macro perspective, the macro economy has been undergoing structural changes which had an impact on both the capital market returns and investors' confidence. So there has been a shift from individuals' investable assets, from asset management products to deposits," Shi explained. 

Additionally, she mentioned the structural changes in the industry playing a significant role. "Bank wealth management products, which used to be the biggest category in China's AuM market, have been affected by a redemption wave back in 2022 and 2023. This, together with some regulatory push towards high-quality development instead of size growth, has resulted in the slow growth of the AuM."

Despite these challenges, mutual funds have emerged as the top AuM contributor, as the devaluation of banks' wealth management products led to a wave of redemptions since 2022. These changes create potential opportunities for foreign players to build their asset management business in China, but they also face specific hurdles.

According to Shi, foreign institutions encounter three main challenges in expanding their asset management business in China, including the pressure on profitability due to fee reduction, optimising channel management, and leveraging the parent company's global or regional expertise while building local capabilities. For wholly foreign-owned enterprises (WFOEs), this balancing act can be particularly complex.

Offering offshore allocation products or services to meet the growing local demand, targeting high net worth individuals in lower-tier cities and among senior citizens, and enhancing the investment experience for high net worth investors are amongst the key opportunities that Shi mentioned to combat the challenges.

“Consequently, those clients have adopted a wait and see approach when it comes to allocating more funds. Asset managers who can provide clients with improved investment experience will have the potential to unlock a larger market,” she said.