Chinese investors a hard target for global firms

Wu Dazhong entrusted his money to a Chinese fund company, but the stock market slump wiped out half the wispy-haired retiree's savings.

"I've been cheated. I'm never going to trust anyone again," the 62-year-old said, tightening his grip on a flask of home-made tea as he ambled aimlessly round a local brokerage in Shanghai.

"Investing in funds: the best way to manage your finances?" he said, reciting what a money manager had told him. "Bah!"

Global managers trumpeting their entry into China's gargantuan market will have to persuade first-time investors like Wu to jump back into a stock market ravaged by corruption dragnets, too many stock offerings and poor company results.

The prize: US$1 trillion in savings stashed away in low-yielding bank deposits.

"It's tougher now. Because the market situation is not so good, people haven't the confidence to put their money into funds," said David Lee, China chief of ABN AMRO Asset Management, which eyes a tie-up with Beijing's Changsheng Fund Management Co.

Even Thursday's watershed government announcement that selected foreign investors soon can trade on the US$500 billion domestic market failed to boost shares yesterday, with the Shang-hai market slipping nearly one percent.

Indeed, a new realism is setting in after the fund industry, wrestling with a severe downturn as global stock markets slump, pinned its hopes on China's embryonic but potentially huge market.

Chinese approved the country's first asset management joint ventures after joining the WTO in December 2001. Approvals handed down to Allianz AG and Societe Generale in October were welcomed by foreign players.

"The potential size [of the market] is unimaginable, so obviously everyone's looking toward the future," said Gerald Klayman, an executive at Baoying Fund Management and a rare foreign employee at a Chinese fund.

Undeterred

Individual punters -- who make up 80-90 percent of daily stock turnover -- are once-bitten twice-shy, and will need lots of persuading. China's benchmark composite index has fallen 30 percent since June 2001, after a steady uptrend in the late 1990s.

Undeterred, more fund ventures are in the pipeline -- ING and Fortis are due to get approval in coming weeks -- and the first funds should be launched by early 2003.

Asset say they are preparing a marketing onslaught next year to entice punters, hoping to hook them through ads and notices at their banking or brokerage partners' branches.

Profits management fees -- won't come for about two years and it will take much longer before China is a major revenue source, managers said. Cheap labor helps, since payroll accounts for up to 60 percent of a given fund's operating costs.

The first approvals for fund firm ventures didn't come easy. Foreign funds had clamored to join an industry where 70 mostly close-ended funds manage just US$13 billion, a sliver of total market capitalization.

Beijing after joining the WTO, hoping to pick up sophisticated management skills and stabilize casino-style markets addicted to government policy boosts.

Foreign firms now are allowed to hold up to 33 percent of a fund firm, and can own 49 percent in three years.

Most ventures will start small, with individual funds of two to three billion yuan (US$240 million to US$360 million), though executives say that's just for starters.

A hard sell

The road to profits, however, will mean negotiating well-known risks in China's markets: murky regulation, poorly performing firms and management practices that rely heavily on personal relationships rather than corporate fundamentals.

"Fund management is a highly profitable industry in China, with nearly all managers making money. But if your fund itself cannot grow in value, you lose clients," said Hu Zhiguang, an expert on fund management with China Securities.

Foreign managers also tell of other problems: differing objectives or partners wheedling associates into key posts.