China's CICC Fends Off Wall Street With Hiring, Takeovers

(Bloomberg) -- As global banks make inroads into China's $15 trillion asset management market, China International Capital Corp. is launching a counter-offensive spanning from overseas acquisitions to hiring.

CICC is searching for potential targets among medium-sized, Asia-focused managers including stock houses and hedge funds, said Frank Xu, head of asset management. Without takeovers, the size of his business line is already expected to jump at least tenfold in the coming decade from a relatively low base, as mandates from commercial banks drive asset growth.

The Chinese broker is also looking for acquisitions in the wealth business as part of a "game of scale," Clark Wu, head of wealth management mainly serving retail clients, said in a joint interview. It hasn't singled out a target yet, he added.

"We are very interested in acquisitions in the international market" for controlling or smaller stakes, Xu said. "The key is business cooperation to complement each other's strengths."

China's asset management sector faces the biggest impact from the opening up of the financial industry, with global giants like BlackRock Inc. estimated to grab a share of as much as 15% in 10 years, CICC analysts wrote in November. Still, with plans to acquire new businesses and talent, local firms may remain dominant given their deeper understanding of what Xu called a "complex and tightly knit ecosystem."

"CICC is confident in adapting to such an ecosystem," he said.

Now controlled by China's sovereign wealth fund, CICC was set up in 1995 as the nation's first Sino-foreign investment bank. While Morgan Stanley exited 15 years later, CICC's "internationalized gene brings it a unique core competitiveness," CSC Financial Co. analysts led by Zhao Ran wrote in a March 26 report.

Revenue from wealth management operations jumped 71% last year to 5.6 billion yuan ($862 million), only slightly behind investment banking. Income from asset management doubled. Profit climbed 70%.

Xu expects his division to add "hundreds of billions of yuan a year" in assets as commercial banks tap CICC to manage client money after regulators banned guaranteed returns on their once-popular wealth management products. Demand for non-conventional services such as product design is also strong, he said.

"Money pours in, but they can hardly handle it themselves," he said of the banks.

Such prospects would be enviable to foreign managers, who have flocked for a piece of the pie from Chinese institutions and rich individuals. They need to overcome obstacles ranging from a lack of distribution channels to an absence of onshore track record before accumulating an estimated minimal 50 billion yuan to break even, CICC analysts estimated.

For wealth management, Wu said he doesn't have such ambitious growth targets but is more focused on delivering asset allocation solutions popular with clients, although "the room for imagination is even bigger on the retail side."

CICC's flagship private wealth management solution has attracted more than 25 billion yuan since its launch in September 2019 as its stable performance appealed to more high-net-worth clients, Wu said. The maximum decline of the product known as China 50, which invests in private funds, was an average 3% during market slumps between Feb. 18 and March 12, less than the 11.4% drop in the Shanghai Shenzhen CSI 300 Index, he said.

Besides competition, cooperation with global players has also been extensive. About a quarter of the more than 30 global firms with a private securities fund license have tapped CICC to distribute products, and China 50 has included some in its underlying portfolio, according to Wu.

Talent War

Behind the growth story is a war for talent, which is key to winning client trust as the industry shifts from selling products for commissions to growing client assets for investment advisory fees.

CICC may expand a team of private wealth advisers focusing on providing asset allocation strategies to 1,500 by the end of this year from fewer than than 1,000 currently, Wu said. Its research group dedicated to screening asset managers has expanded to about 200, already the largest among local peers.

At the asset management department, which will be converted into a separate subsidiary once the company obtains a second mutual fund license, Xu expects the number of staff to keep growing by 20% to 30% annually in the next few years. He hired more than 150 experienced people last year alone, expanding the team to about 350 now.

To supplement organic growth in asset management, Xu said CICC is looking to acquire smaller rivals in Asia managing up to "tens of billions of dollars," to help tap growing global demand for Chinese assets. After CICC bought a majority stake in Krane Funds Advisors LLC in 2017, the U.S. manager known for China-focused KraneShares exchange-traded funds expanded assets by more than 30-fold.

"That was an initial, small success," Xu said.