Evelyn Cheng | CNBC
In 2017, UBS became the first international wealth manager to establish a presence in the Qianhai free trade zone, aimed at boosting financial cooperation between Shenzhen and Hong Kong.
As China cracks open the door further to its massive financial market, a handful of foreign firms are pulling ahead of the pack.
UBS, Invesco and J.P. Morgan topped Shanghai-based Z-Ben Advisors' annual rankings released Monday for the 25 best foreign money managers in China. Data was collected as of December 2018, and scored firms by three business lines: onshore, outbound and inbound.
For UBS, it was the second year the Switzerland-based asset manager ranked first. The company has been investing in China for 20 years and has also become a front-runner in building a domestic securities business.
In November, UBS became the first foreign bank to receive Beijing's approval to take a majority stake in its joint venture with China Guodian Capital. For the last decades, previous policy limited foreign banks to minority stakes, giving local partners more control.
"The least predictable aspect of the China market is the pace of change. As a result, China is not a market you lead it's a market you grow with," Z-Ben Partner Chantal Grinderslev said in an email to CNBC. "With that managers now find themselves at a critical juncture."
She added that whether or not companies are willing to invest in learning about China will separate leaders from laggards in the market. Z-Ben expects mutual fund flows will grow assets under management in China to $12 trillion by 2027.
In the last 12 months, some Chinese stocks and bonds were added to global benchmark indexes run by MSCI and Bloomberg. Analysts expect the inclusion will drive billions of dollars in fund flows to China in the next few years.
As for the top managers for China's inbound businesses, Fidelity International – the now independent overseas arm of the U.S. asset management giant – ranked first, overtaking BlackRock in this round of Z-Ben's rankings.
Gap between leaders and laggards
This year's rankings also found that the gap between the top six foreign money managers and the 19 others is growing. UBS took top spot, followed by Invesco, J.P. Morgan, Schroders, BlackRock and Fidelity.
Second-place Invesco topped UBS in the onshore money management category. Z-Ben cited "public groundwork on a move to 51% (ownership)" and the launch of a separate private fund. Invesco did not respond to CNBC's email request for comments.
As for J.P. Morgan, its asset management division remained the industry leader in Chinese outbound investment, according to Z-Ben.
J.P. Morgan Asset Management announced in January that two more of its funds were approved for "mutual recognition." That means the U.S.-based bank can now access investors in mainland China, in addition to those in Hong Kong. It brings to four the total number of J.P. Morgan funds with such status.
"China represents one of the largest opportunities for many of our clients and for J.P. Morgan Asset Management globally – it is a critical component of our global growth plans," Elisa Ng, head of funds business, Hong Kong and China, J.P. Morgan Asset Management, said in a statement.
"It won't take many more years for those managers still in the process of asking 'what' they want to do in the (Chinese) market to fall out of the rankings entirely." -Chantal Grinderslev, partner at Z-Ben
In the brokerage and investment banking business, J.P. Morgan gained Beijing's approval in March to establish a majority-owned securities joint venture in the country. Japan-based Nomura received regulatory approval on the same day.
Last week, Credit Suisse also announced it intends to increase its stake with joint-venture partner Founder Securities to a majority one, pending regulatory approval.
"The China question still depends most on where the global managers are themselves, not where the market is," Z-Ben's Grinderslev said. "Regulators are moving quickly to disprove this."
"It won't take many more years for those managers still in the process of asking 'what' they want to do in the market to fall out of the rankings entirely," she said, "and it remains uncertain whether they will be able to claw their way back — or whether that will even be an option."
Critics say foreign access to China's financial markets is still coming along too slowly. In practice, they added, efforts to give overseas players equal treatment with local ones face many challenges.
In credit card services, Mastercard and Visa have still not gained domestic access while China's UnionPay is growing overseas.
Some of the regulatory approvals have also come at a time when important negotiations in the U.S.-China trade dispute take place. But any change is welcome news for many foreign companies that have decided to put up with Beijing's regulatory challenges for a chance at growth.
"We have a deeply-held conviction in the opportunities presented by this dynamic market and continue to invest in our business as one of our top strategic priorities," Raymond Yin, head of Asia Pacific and head of China onshore for UBS Asset Management, said in a statement. "Our goal is to be the leading asset manager in China for onshore and international clients, combining our local expertise with our global capabilities to help them navigate this important market."
