China Channels Greenwich as Asset Management Push Continues

Aug 30 2016 | 7:42pm ET

Chinese markets may have been on a terrific roller coaster over the past year, but that hasn’t deterred the country from trying to fast-track the development of its alternative asset industry.

In fact, the country is making a concerted effort to recreate the geographic clusters of alternative asset managers found in such places like Greenwich, CT. Multiple areas within Mainland China are reportedly vying to mimic Greenwich’s unique blend of urban proximity, asset management concentration and high net worth denizens, including Hangzhou near Shanghai, Beijing’s Fangshan and Chengdu’s Lushan.  Named “fund towns”, these clusters-by-decree are the latest iteration of industry- and sector-focused specialist communities designed at the outset to serve a particular function – there are technology towns, tourist towns, manufacturing towns, etc. All are emblematic of the nation’s centrally planned economy, and not unlike small municipal governments in the West, local Chinese officials are eager to host them.

“There are really two things going on,” explains Connecticut Hedge Fund Association (CTHFA) president Bruce McGuire, who has hosted Chinese delegations on the topic and traveled extensively in  China. “First, the Chinese recognize that wealth is building quickly in their country, and the people managing that money may as well be in China as in London, New York or Greenwich. Secondly, they also understand that the typical clustering that has taken place here takes decades to form and is somewhat hit or miss, so creating them by design is a faster and more preferable solution if you’re trying to build a competitive center of gravity quickly.

Granted, Greenwich in particular – which is home to the worlds 3rd largest concentration of hedge funds, according to the CTHFA – formed largely due to its proximity to New York, superior quality of life and relative tax advantages. Development accelerated once technology advanced to the point where being off Wall Street was operationally possible. Whether China’s planners can mimic a similar trajectory remains to be seen, but hopes are high: officials expect Lushan Fund Town will have 150 private equity funds, mutual funds and ancillary service firms collectively managing more than 200 billion yuan. By 2030, they expect more than 1,200 institutions there.

And that’s just one town. Hangzhou, one of China’s wealthiest areas and site of China’s first ever G20 Summit later this month, boasts two-year old Yuhuangshan, a fund town with more than 500 venture capital, private equity, and systematic asset managers with combined AUM of 320 billion yuan – or around $48 billion.

On the surface, the plan makes sense. Clusters are well-researched economic phenomenon that, when properly anchored, become self-fulfilling engines for the employment, housing, consumer retail, and lifestyle sectors.. How such towns will fare through the inevitable boom and bust cycles of the financial markets, however, is a key question; events similar to the Shanghai Stock Market’s 30% swoon last year will undoubtedly winnow the number of Chinese hedge funds considerably, as will a regulatory environment that arrests short sellers. And much like the Midwest steel towns in the 1970s, fund towns without any funds might be pretty desolate places.

Add in the various legal and administrative maturation that still needs to occur within China’s financial markets, and the jury is still out whether financial services clusters can operate and succeed in the same way China’s outsourced manufacturing ones have over the past twenty years. “Replicating what Greenwich has become in terms of the alternatives industry is going to be difficult,” McGuire says, “It is more than just snapping your fingers and planting a bunch of money managers in the same zip code. Greenwich became what it is because of a unique set of circumstances that favored development into an cluster. China’s fund towns may well become very successful – the sheer numbers might ensure it – but they are likely to be something fundamentally different than Greenwich.”

Nonetheless, China is clearly on a crash course to develop its domestic wealth management industry, and it is betting on fund towns to service the rapidly growing number of Chinese investors interested in traditional as well as alternative asset management. Importantly, the managers that locate in its various fund towns do not need to be all home-grown, at least not yet. “We asked one of the Chinese representatives if they were making fund towns for domestic Chinese managers or for new Chinese units of international managers,” added McGuire. “The answer? Both.”

Editor’s note: CTHFA is hosting a conference on the emerging growth of the Chinese financial sector on September 8th in, of all places, Greenwich. Speakers will include Gavekal’s head of research Art Kroeber and Standard Chartered’s James Xu. Click here for more information.

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