The Rush Is On--for "The Biggest Market in Asia"

China opens up to foreign banks and fund managers

When Chris Ryan kicked off ING Investment Management's first mutual-fund venture in China in March, he figured that, with the SARS epidemic hammering the economy, he might bring in a maximum of $302 million. To his surprise, when the fund launch closed in late April, Ryan, ING's regional director for North Asia, had snared an impressive $550 million. "We're delighted," says Ryan of the success of the new financial firm, called China Merchants Fund Management Co., of which ING owns 30%. More than 30,000 mainland Chinese retail and institutional investors signed up for three new funds, which are run as a joint venture with the Shenzhen-based China Merchants Securities Co.

The rush is on. Egged on by its World Trade Organization treaty commitments and a need for foreign financial knowhow, China is at last opening its markets to foreign fund managers and investment bankers, who have been waiting a decade for a piece of the action. Today, the market for China-based mutual funds is only about $20 billion -- peanuts compared with the $1 trillion that the Chinese have socked away in savings accounts. But optimists say that's about to grow exponentially. J.P. Morgan Chase & Co. says funds under management could hit $100 billion by the end of 2004 and approach $1 trillion by the end of the decade. "China is going to be the biggest market in Asia for financial services," says Clive Brown, the London-based head of J.P. Morgan's international asset-management business. "We need to be there."

And Western bankers are there, in increasing numbers. J.P. Morgan, which had seen an earlier agreement for a fund-management venture fall apart, announced in April that it had started a new fund with the investment arm of the Shanghai city government. Meanwhile, ABN Amro's joint venture with Shanghai's Xiangcai Securities Co. raised $320 million earlier this year. And in late April, CLSA Emerging Markets, a unit of France's Crédit Lyonnais, inked an investment-banking linkup, also with Xiangcai. French Prime Minister Jean-Pierre Raffarin and Premier Wen Jiabao toasted that and other Sino-French deals at an Apr. 25 ceremony. "These Sino-foreign securities partnerships will definitely be win-win," predicts Chen Xuerong, chairman of Xiangcai Securities Co.

The Chinese, however, won't be giving up control. The most a Western bank can own in a money manager or investment bank is 33%, rising to 49% at the end of 2004. And Chinese investors still aren't allowed to put their money into any foreign bonds or equity.

After years of casino-like booms and busts induced by local quick-buck artists, government officials in China want foreign fund managers to import Western standards to the stockpicking trade. "The real intention is very simply to inject more professionalism into the fund management arena," says Anthony Neoh, a senior adviser to the China Securities Regulatory Commission.

Investment banks, meanwhile, are needed to help guide Chinese companies through a much-needed phase of consolidation. The only existing joint venture is China International Capital Corp., set up experimentally nearly a decade ago with Morgan Stanley as a 35% shareholder. The firm is now run by Levin Zhu, the son of former Premier Zhu Rongji. CLSA is happy to be second in line. CLSA Chairman Gary Coull hopes to dig into a "gold seam" of mergers and acquisitions as Chinese townships, provinces, and other government entities begin to sell off stakes in everything from coal mines to corner grocers. "There has never been an M&A exercise as massive as this," says Coull.

Of course, China has a rich history of failed ventures. The latest that appears to be in trouble is Newbridge Capital's bid for a controlling stake in Shenzen Development Bank. Even so, China seems committed to financial liberalization over the long run. And even Western banks that have failed in China are eager to try again.

By Mark L. Clifford in Hong Kong, with Alysha Webb in Shanghai

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