China to open mutual fund custody business

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SummaryChina plans to allow foreign banks to act as custodians in its $380 billion mutual fund industry for the first time.

China plans to allow foreign banks to act as custodians in its $380 billion mutual fund industry for the first time, the latest move amid a raft of government reforms that seek to develop the country's financial system.

But foreign banks are unlikely to pose much of an immediate threat to China's biggest state-owned lenders, who can leverage their unparalleled distribution power to win and retain clients.

Draft rules were posted on the securities regulator's website on Wednesday evening and it is currently seeking opinions from the public.

In order to promote competition in the fund custody market, China plans to open the business to foreign players, the China Securities Regulatory Commission said in a statement.

Some 18 custodian banks in China supervise 1,100 mutual funds worth 2.37 trillion yuan ($380 billion), according to data from the Commission as of end-September. This year, China has allowed foreign banks to distribute mutual funds and raised the ceiling of their ownership in a Chinese brokerage to 49 percent.

Some foreign bankers say privately that they hope to woo clients with cross-border investments under the Qualified Foreign Institutional Investor (QFII) and the Qualified Domestic Institutional Investor (QDII) schemes.

They also hope that China will deregulate the custody business further so that they can win hedge funds as clients.

But in an industry where banks that gain custodian mandates are the ones with the biggest distribution networks, foreign banks face an uphill battle.

For example, HSBC Holdings Plc, the biggest foreign bank in China by branches, has opened about 130 outlets. That compares with over 16,000 for the Industrial and Commercial Bank of China, t he country's biggest lender.

According to the draft rules, qualified custodian banks in China must have at least 2 billion yuan in net assets in each of the past three years, and must meet capital requirements set by regulators.

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