As China’s stock market is rapidly integrated into the global financial markets, it is critical for institutional investors to understand the operational benefits and challenges that investment managers face in that country. To get a better sense of this issue, I met with multinational managers in China last December and discussed the benefits and challenges of having a local presence. There are over 110 licensed asset managers in China. Approximately 100 are either Chinese/foreign joint ventures or purely domestic operations, with the remainder represented by securities and insurance companies.
The China A-shares market is a large hunting ground, with more than 3,000 stocks listed on the Shanghai and Shenzhen exchanges. Its sheer size, the country’s regulatory environment, and the multiple corporate structures used by companies add layers of complexity that can be challenging for active managers to navigate. In order to better understand the Chinese market, most global equity managers travel to China; some have dedicated China specialists and others go a step further and establish regional offices in Beijing and Shanghai. The benefits of a local presence can include:
On-the-ground company visits and research: Given that 80% of the daily trading volume is driven by retail investors in China’s equity market, many A-share companies do not have a dedicated investor relations team.
Many A-share corporate management teams only give investors a three-day notice of availability, making it difficult for investment manager research teams to plan visits in advance. Being on the ground, the local research teams can schedule trips quickly and also meet with suppliers and distributors within the area. Furthermore, with China being one of the largest markets for Mercedes Benz, Starbucks, and other multinational companies, investment managers are studying Chinese consumer behavior because this revenue source may affect the companies they own in their global equity or even developed-only equity portfolios.
Local knowledge of business culture and corporate governance: The cultural norms of corporate management in China can be different from other parts of the world. While some corporate management teams are capable executives, they might not be as experienced in meeting with foreign investors. Some senior managers of state-owned enterprises may view investors as “journalists” and may feel uncomfortable disclosing detailed information. Having a local team with members who grew up in China is important, as they speak the language and understand how to better approach corporate management teams and ask the proper questions.
Local expertise on China’s policy-making efforts and its capital markets: The Chinese government has been very open about its willingness to deploy capital to meet its objectives, such as its Made in China 2025 plan, to upgrade the country’s manufacturing capabilities. Having local expertise on China’s policy-making efforts and its capital markets helps managers understand why certain business models work (or do not) in China.
Finally, it is important for institutional investors to understand the hiring challenges faced by asset managers. Given that China is a relatively young investing market, multinational managers have long struggled to find qualified local staff. The talent pool can be very shallow if managers also require a Western education and work experience overseas. Furthermore, keeping talent can be difficult as asset managers are fighting over top candidates in this competitive market.