Almost everything about China is big -- its geography, its population, its manufacturing capacity. Almost everything except its financial services sector, that is. But that is beginning to change.
China's mutual fund industry is currently one-tenth of the size of the U.S. market, but it is expected to grow drastically as China opens its doors to international trading. And if the Chinese middle class continues to expand and increasingly invest in mutual funds, the local market has the potential to become one of the largest in the world and could provide a huge pool of investors to the international markets.
Like other countries around the world, China's economy has been hard-hit by the global financial crisis -- assets under management at mutual fund companies in China shrank from US$457 billion in 2007 to US$275 billion by the end of 2008, according to Zhou Hua, president of SunGard China. (By comparison, in the U.S. the mutual fund industry's assets stood at $9.6 trillion at the end of 2008, down from $12.04 trillion the previous year, according to the Investment Company Institute.) But due to new regulations allowing Chinese companies to trade internationally and the fast development of innovative investment vehicles such as pensions and separately managed accounts, Zhou Hua says, China's mutual fund industry could surpass US$1.5 trillion by 2012.
The country's gradual transformation into a global financial player is already creating a wealth of opportunity for Western financial firms and technology providers. Since Chinese firms are relatively new to the game, they must rely on the expertise and technology of their Western counterparts to become a real force in the international markets.
Raising the Gate to Foreign Investing
Concerns over risk exposure first led Chinese regulators to introduce in 2006 the Qualified Domestic Institutional Investor regulation, better known as QDII, and open the country's notoriously tightly controlled securities markets to international investing. At that time the government decided -- following the "Don't put all of your eggs in one basket" investment mantra -- to try to diversify the portfolios of Chinese investors by allowing Chinese financial institutions to invest in foreign markets.
Until 2006 the Chinese could only invest in domestic stocks and bonds or sit on their cash, according to Oliver Schuurman, sales and marketing director at Z-Ben Advisors in Shanghai. Then in 2007 retail investors were given access to offshore investments via mutual funds. "Through international investing the Chinese can have access to all kinds of alternative investments," he says.
Under QDII firms initially were permitted to invest only in fixed income and money markets. But the plan was eventually broadened to allow firms to invest in other products too. Then, in 2008, China and the U.S. agreed to allow Chinese citizens to invest in the U.S. stock market through mutual fund organizations or other asset fund companies in China. For the first time, some 1.3 billion Chinese were allowed to invest in the U.S. stock market.
"The time the QDII regulations were put in place was the time of the Chinese equities bubble," explains Neil Katkov, SVP, head of Asia research for Celent in Tokyo. "There was a rise in equities values that was very rapid, and the government thought it looked like a bubble. It was a bit speculative; there was a lot of excitement from investors. So [regulators] wanted to open up the market to different types of investment, to asset diversification."
Indeed, foreshadowing what was about to occur in the global markets, the Chinese equities market did crash, losing nearly half of its value in 2007 and 2008. "The Chinese government was right," Katkov says. "Individual [Chinese] investors are very interested in exposure to other markets, and financial institutions know the products are available in the most developed markets -- the Western markets."
A Nation of Savers
One of the reasons behind the Chinese people's strong desire to invest is a cultural emphasis on the elderly and preparing for the future. Like other Asian countries, China has a very high savings rate. But without corporate-sponsored retirement plans, such as 401(k)s in the United States, or substantial help from the government, the Chinese must take complete charge of their own savings and retirement planning.
And they do a good job of this. According to a report in China Daily, the largest English-language newspaper in China, economists estimate that the average Chinese citizen saves between 30 and 40 percent of his disposable income -- a rate that is at least twice as high as in the U.S.