Land of the blind

First, I need to address the stark reality: sentiment in the China investment space remains dismal. This is no better illustrated than by the Greater China funds complex which has been hit by both declining securities prices and substantial outflows. To further stress the point, China is deemed so “uninvestable” that there is genuine career risk from just broaching the subject with institutional clients.

This challenging backdrop has certainly influenced the outcomes in this year’s China Rankings. However, we must also consider the relative progress by those global managers which have remained committed to the China market. On this point, I first need to return to 2018 when our outlook for competitive success was quite optimistic. The domestic market was on the precipice of wholly foreign owned participation and local competition comprised mostly large, staid managers. Innovation was extremely limited, and inefficiencies were widespread and ripe to be exploited. We expected global groups to enter, capitalize on their competencies, scale quickly and command market share of a combined 25% by 2028. Even as I write that last sentence I wince. We weren’t overly optimistic. Instead, we were naïve – just not for the reason you might think.

Our naiveté stemmed from failing to account for commercial conceit. This isn’t meant as disrespect but as an observation. Having assessed every single global manager operating a wholly owned business unit locally in China, there is a common pattern: these business units are run in the exact same fashion as any other international operation. The belief that strategies effective in Tokyo, Taipei or Seoul would succeed in Shanghai couldn’t be farther from the truth. This is now showing up in the results – be that for groups running a fund management business or a bank wealth management “joint venture”.

The policies being adopted are policies of inertia that simply don’t fit in a growth market such as China. There is a tendency to lean towards “this is how we do things” which has manifested as an unwillingness to adapt to local market practices. This is not an oversight of the importance of risk management and compliance, or the value of global frameworks. We understand that these are vitally important. But so too is an acknowledgement of the unique aspects of the onshore market. Something has got to give. Without greater flexibility and adaptability, long-term success will be all-but impossible. A starting point: for those with a local business unit, micromanagement is not the answer.

I would like to add one final comment. This is now my fourth “China is collapsing” cycle. While I’m not here to downplay the structural risks facing China, these are the very same risks that have persisted for decades. What differs this time around is media focus and a wider dissemination of overwhelmingly negative storylines. It’s become a vicious feedback loop and has intensified the bleak sentiment. My message stays the same: filter out the noise.

Peter Alexander – Managing Director, Z-Ben Advisors

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