China's Great Wall No Longer Keeping Outsiders at Bay
April 12, 2004
The Great Wall doesn't seem as insurmountable as it once did, as China and its Asian neighbors are rolling back barriers, letting Western companies penetrate their fund markets.
A rash of activity and increased buzz surrounding the various markets of Asia has led to the most recent wave of product launches. Trying to capitalize on what is predicted to become a plentiful breeding ground for middle-class wealth, firms are trying to plant their roots into the soil before the markets completely take off.
Andrew Clark, an analyst with Lipper, said there is a growing recognition among Asian countries and the U.S. that the two giants of Asia, India and China, will have thriving middle classes within 10 to 20 years. Some have predicted that China, the U.S. and India will rank as the three largest economies in 50 years.
"You've got a situation, particularly in southeast Asia, where you have a growing per capita income," said Martin Schulz, director of international equity investments for National City Investment Management Co., advisor to the Armada Funds. "Singapore and Hong Kong have always been fairly wealthy locales in the region, but now across the board, in places like Malaysia, China and even Vietnam, you've got an emerging wealthy group of people.
"In the next few years, you will be getting into areas where people are saving and investing, something that wasn't even considered before, because they didn't have disposable income," Schulz said.
In China, the restrictions have only recently begun to ease, as the number of funds has increased from 20 to 22 in the last five years, according to Lipper. However, Pacific region funds have jumped from 26 to 42 during that time, and Pacific, excluding Japan, rose from 41 to 61.
But things are starting to change. Last month, Prudential Financial and China-based Everbright Securities said they have received a license to launch a mainland China fund under the name Everbright Prumerica Fund Management Co., a joint venture between the firms.
Prudential will be 33% owner of the joint venture, while Everbright will possess the remaining 67%. However, Prudential may be able to up its stake to 49% later this year, due to the anticipated relaxation of rules by the Chinese government. China only began permitting joint ventures between Chinese-based and foreign companies in 2002.
"China is starting to open its doors to outsiders to sell its products," said Schulz. "They're starting to break those walls down." He said that the reason Hong Kong has been successful to this point is in part due to a regulatory climate that is more welcoming to outsiders.
Also in March, Janus Capital launched a U.S. large-cap value fund in Honk Kong, the Janus World U.S. Value Fund. Designed to provide Asian retail and institutional investors with a broad range of investment strategies, the fund is one of the latest to be launched by a non-Asian firm trying to further infiltrate that market. The fund is sub-advised by Vontobel Asset Management, of New York.
And the performance of funds that invest in the region has been extremely strong. In the past 12 months ended April 4, China region funds returned 71.7%, Japan funds 71% and Pacific Region funds 65%.
While the notion that Asia is an area for growth is nothing new, the momentum in the area took a setback in 2003, when North Korea took the international stage by touting its nuclear weapons program and then later, the SARS outbreak gave investors and firms pause. When those situations finally subsided, the fund industry found itself mired in the midst of the largest scandal ever in the industry, largely centered around stale pricing methods and market timers in international funds.
The waning interest in the scandal among the general press is only part of the motivation for the timing of the new initiatives in Asia. "I think that part of the motivation is the scandal stories have moved from page one to page 12 [in the general newspapers], but I don't think that's a major reason," Clark said. "I think it's due mostly to the growing interest in Asia on the part of citizens of the U.S."
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