For Merrill Lynch, the launch of its new Chinese fund management joint venture presents many of the familiar challenges it has faced throughout the region over more than a decade.
As in Thailand, Taiwan and even in the early days in Japan, the US investment bank is entering a market where few investors have any experience in managing their money through mutual funds.
The result is usually a debilitatingly large amount of redemptions as soon as the equity market starts to head south.
“For us, this is not a terrifying ordeal,” insists David Peng, deputy chief executive of the joint venture. “We fully expect the market to behave in the way it does.” He points to a relatively low level of investment knowledge in many Asian markets. Hence Merrill's focus on investor education. Its joint venture partners are Bank of China International, the investment arm of China's largest foreign exchange bank, and one of the bank's offshore subsidiaries in Hong Kong. The high profile of Bank of China in the domestic market means that the joint venture will bear its name, rather than that of Merrill.
“The Bank of China is instantly the most recognisable brand in China,” says Mr Peng. “It is very helpful to build on their brand.”
Merrill has only a 16.5 per cent stake in the joint venture, well below the 33 per cent level allowed under China's accession agreement with the World Trade Organisation.
Merrill has said it may increase its holding to 30 per cent when the ceiling for foreigners rises to 49 per cent in the next couple of years. But in the meantime, Mr Peng insists its small stake is not an issue.
“Shareholding is left at the door,” he says. “Clearly, it's not how big the initial slice of the pie is, but how well you work to grow that pie.” Like most foreign investment houses, Merrill expects China's fund management industry to grow rapidly in the next few years on the back of a high personal savings rate and a desperate need for new and credible investment outlets.
About Rmb90bn has been raised for new funds in the six months to this year, and total assets under management are now about US$25bn.
A big difficulty is the local stock market, which has entrenched legacy problems, both from the poor quality of the listed companies and the government's majority ownership in most enterprises.
Although China has many similarities to other emerging markets, the role of regulators is different, says Mr Peng.
“There is a commercial factor in the decision making of the regulators,” he says. He believes this approach is fostering an “IPO mentality” in the launch of funds.
While this may ensure that funds are launched successfully, it also means that many investors, as well as people marketing funds, lose interest in the product once it has opened. Mr Peng says he believes the “IPO mentality” will become more “muted” as the market develops.