Asset Management Embraces Technology in Chinese market, US players enter
As China is opening its marketplace, players from outside are gathering around the rising cake, eager to take a bite.
According to EY's report, 2019's global total asset management scale (AuM) hit a record high of USD 95.3 trillion in total, more than double the growth of 10 years ago. In 2018, due to the volatility of the global capital market and the weak endogenous growth of the industry, the global AuM experienced its first decline after the financial crisis.
At the same time, as the features of the 'Matthew effect' intensify, management fees are squeezing industry profits, there is more strict regulation, arbitrage space is narrowed, and so on. All the factors indicate that transformation is urgently needed, and technology is becoming the key.
Since asset management is also a component of the fintech family, the most widely used technology also applies in this traditional finance area. Besides the most frequently talked about– AI and big data – robo-advisors can dig deep into financial products and provide customers with personalized dynamic solutions. Blockchain technology can solve problems such as asymmetry in transaction information, and security technology can ensure the security of transactions.
As China is always a hot area when talking about financial innovation and speedy growth, asset management here is watched carefully by United States-based incumbents. Recently, several actions have been launched which accelerated the opening steps of the Chinese financial market, namely: FTSE Russell raised the A-share inclusion factor; Goldman Sachs and Morgan Stanley increased their shareholdings in joint venture securities companies to 51%.
The US capitol giants show strong interests, and we will compare the industry status quo in these two nations to get a basic overview of where the differences lie.
The asset management industry in the US and China's state of development are pretty different.
The US is the largest AuM in the world; as of July of 2019, the scale was nearly USD 33.5 trillion. It accounts for about 44% of the total global asset management; the size of the US public funds is about USD 21.1 trillion, accounting for about 45.2% of the global management scale. Besides, in the US fund market, the asset management scale of the top 100 accounts for the total market size of 97%.
While for China's industry nowadays, as of the end of 2018, the total size of China's asset management industry was (in chinese) about CNY 124.03 trillion (USD 17.6 trillion). Banks in China is the most scaled player, following trust plan. As of the end of 2019, public fund management institutions managed (in Chinese) 6,544 public funds, with a scale of about CNY 14.8 trillion (USD 2.1 trillion). In terms of income, Wind data shows that, in 2019, 99% of public funds obtained positive returns, and funds with a return rate of more than 10% accounted for 55%. In 2019, the Shanghai exchange's Star Market was one of the hottest topics in the Chinese financial circles. Funds that invested in this concept, which is focused on the new venue's stocks, could boast a 35.78% return as of 2019.
The markets differ a lot
One reason for the diverging tracks taken by the two superpowers is that China has a strong possibility to take advantage of a 'leapfrog' pattern in development. As China's post-80s and post-90s generation rise to prominence, they show a higher acceptance of financial products provided by Internet giants. Accordingly institutionalized investment may shift to online robo-advisors. The US first had years of asset management industry progress, then P2P platforms, and then some capital poured in seeking a higher rate of return – and this latter aspect is maybe a reason why these platform's interest rates are so high. While China had the P2P platform first, that was then mostly killed and the capital went back to the asset management industry for future growth.
In addition, robo-advisors focus more on personal users' financial products while the US focuses more on target date funds and pension asset management. The reasons mainly lie in the investment targets: US prefers long-term investment and pensions while China's investors like speculation and the short term. However, as the aging population in China is and will continue to be a problem, this preference has the potential to change.
Moreover, depending on the strength of the fintech ecosystem, mobile payment will become China's asset management industry's way of promoting itself. For example, Alipay is cooperating with Vanguard to launch robo-advisor-based personal financial investment products at a below-CNY 800 (USD 113.19) threshold. Mobile payment in the US charges more – Paypal is 1% of amount transferred, with a maximum fee of USD10.00 for transaction – while in China, the transactions between accounts using the same platform is free.
Overall, the application of technology in China's asset management industry is still in the early stages, especially compared to AI or big data, which is already widely used. This industry of course needs much greater levels of professional knowledge and technology.
Opening the market
On April 1, China's financial market took one more step towards the open market and announced that fund company foreign share ratio restrictions will be lifted, and insurances, securities, asset management players will be allowed in, except for banks. Some top asset management giants have launched their branches in Shanghai, including Russell Investment Management (Shanghai), Jingshun Ruihe (Shanghai) Equity Investment Management and Luguang Global (Shanghai) Asset Management Company.
Besides, in February, foreign investors increased their net holdings of domestic bonds by USD 14 billion, compared with a net increase of USD 1.4 billion in January. The RMB asset hedging role is increasingly visible. The open market brings chances for foreign players, while the competition in the market may become even intense. A synergy is emerging: the domestic players know the market well, while the foreigners are good at technology. As China is still on the way to opening its market, the technology and understanding of users and markets will become the main factors in deciding which participants can take a bite from this cake.