Foreign funds find China tough nut to crack

Ask a global fund manager which is the one market they are most desperate to get into and chances are the answer will be China. Then ask whe...

Ask a global fund manager which is the one market they are most desperate to get into and chances are the answer will be China. Then ask when they expect to make money here and the reply is just as often an eloquent shrug. Fund managers don’t confess to not knowing, despite the myriad of problems which confront any foreigner hoping to tap into Asia’s second-biggest stock market and a country with one of the highest savings rates in the world. Foreign funds have to find their way through a potential minefield of unknowns, including murky Chinese policy, getting into bed with local partners with different investment ideas, and holding only minority stakes in joint ventures—even assessing the risk/reward potential of a Chinese company is unconventional.

“Everyone agrees that the China market is very attractive, but the risks are also relatively high,” said Xu Zhilin, assistant CEO of Guotai Fund Management. The trickiest part for foreign funds could be managing the relationship with a majority Chinese partner more relaxed about the risks of the mainland’s unpredictable $500 billion markets, currently mostly shut off to overseas investors. “Foreigners need to know how to be viable as a minority shareholder,” said Fu Teh Hsiu, head of UBS Global Asset Management’s greater China office. “The key is making sure our investment process is applicable in the local market.”

Foreign funds have to team up with Chinese firms, either by investing directly in them or setting up a joint venture, but are only allowed to take up to a maximum 33-per cent stake. The limit will rise to 49 per cent three years after China’s WTO entry last December. But how to get a foot in the door isn’t yet clear. Aware that it needs foreign expertise, China has promised to open up the sector to overseas funds but has yet to issue concrete regulations needed for implementation. Fund managers say it remains a mystery when, how many and under what criteria foreign applications will be accepted.

One disgruntled Singaporean fund executive, for example, told the seminar China appeared to be ignoring Asian firms since only Western players have successfully found Chinese partners so far.

(Reuters)