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Finance

Can You Get $10 Billion of Stock Orders in 10 Hours?

Active managers are still making money in China. With the market opening up to foreigners, Goldman Sachs and BlackRock are piling in.

Can You Get $10 Billion of Stock Orders in 10 Hours?

Active managers are still making money in China. With the market opening up to foreigners, Goldman Sachs and BlackRock are piling in.

Riches await you.

Riches await you.

Photographer: China News Service/Visual China Group
Riches await you.
Photographer: China News Service/Visual China Group

The last place on earth where bankers and traders can make real money is opening up. 

As part of its trade deal with the U.S., China vowed to grant Western financial institutions more access to its $14 trillion wealth-management industry. A number of foreign-controlled joint ventures with banks are in the works. Days before Christmas, Beijing approved the first one, a tie-up between Amundi Asset Management and a unit of Bank of China Ltd. Shortly afterward, China Construction Bank Corp. agreed to partner with BlackRock Inc. and Temasek Holdings Pte, while Industrial & Commercial Bank of China is flirting with Goldman Sachs Group Inc.

Millions of dollars are being thrown at this. JPMorgan Chase & Co. and Nomura Holdings Inc. are buying up extra office space in Shanghai, where staff could be paid more generously than in Hong Kong. Goldman plans to double its headcount in China to 600 over the next five years. But why would foreigners want to crowd into the world’s most competitive market? 

Simple: Investors in China still have faith in active managers. Last year, it took just 10 hours for a star stock picker to attract more than $10 billion in orders for his firm’s debut mutual fund.

Foreign firms might reason that they have deep talent pools, too. Bin Shi, a portfolio manager who has been with UBS Group AG since 2006, can churn out profit better than many of his mainland competitors. His Luxembourg-registered All China Fund returned 50% over the past year. By tapping into local banks’ distribution networks, Western asset managers could benefit from the army of retail investors that might come crowding in.

If allowed to compete, Wall Street managers could almost effortlessly bat local competitors away. After all, Beijing wants Chinese wealth managers to emulate the U.S. model. In the West, middle-class savers have built up their nest eggs with mutual funds. They get some sense of their risk-return trade-off by checking (sometimes obsessively) the charts and numbers that showcase the historical ups-and-downs of their fortunes.

Not so in China. Two years after the government unveiled sweeping rule changes, many products still carry the false perception of guaranteed future returns. It’s not uncommon for money managers to post these forecasts on their websites weekly. The concept of metrics like net asset value remain completely foreign to a money manager sitting in a Chinese bank branch. In that sense, Western competitors are miles ahead.

Then consider the options. If Chinese savers looked at BlackRock’s range of offerings, for example, they’d be blown away. Some funds are designed to help you retire by 2040, while others are more tactical in nature. Blending bonds with stocks in a portfolio is commonplace, and financial metrics such as the Sharpe Ratio or effective duration for fixed income funds are readily available for savers to peruse, if they decide to get a bit technical.

In China, investments that can deliver steady, stable gains are rare. Moms-and-pops are stuck with either bank deposits, which are essentially subsidies to the state-owned banks, wealth management products — nowadays pretty boring, thanks to Beijing’s sweeping rule changes to limit risk — or speculative private funds that can cost you dearly.

To Beijing’s credit, foreigners have a fairly level playing field in the asset-management business. The new rules, which require banks to spin off their wealth units, are re-drawing the landscape entirely. The first such operation opened for business just six months ago, and there are now about half a dozen. It wasn’t until early December that the government even finalized net capital rules for these operations. So assuming the likes of Goldman and BlackRock can get their licenses quickly, their peers won’t be that far behind. That’s quite a positive step for a country that actively blocks Alphabet Inc.’s Google and Facebook Inc. to allow its domestic players flourish.

Of course, we all know the realities of marriage: Whether a partnership yields happiness is anyone's guess. But that shouldn't discourage Western asset managers from trying. There's plenty of money to be made.

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Rachel Rosenthal at rrosenthal21@bloomberg.net