BlackRock, Fidelity Lose Out in $1 Trillion China Pension Market

(Bloomberg) — In the battle for the biggest prize in China’s trillion-dollar pension market, BlackRock Inc. and other global firms have little chance of attracting clients like Judy Deng.

Most Read from Bloomberg

On New Year’s Eve, the logistics executive tapped on her phone to deposit 12,000 yuan ($1,700) into a new pension account at her local bank in Shanghai. Deng, 46, never considered investing with the likes of BlackRock or Fidelity International.

“You need a very strong reason to pick a foreign company,” she said, calling the global giants “very unfamiliar” names. “I don’t even know which country they’re from.”

China launched private pension plans for the first time last year and Beijing has ensured that domestic banks and fund managers win the vast majority of the new business in a market that may eventually grow to $1.7 trillion.

Given their tiny asset bases in China, most foreign money managers have so far been excluded from pilot trials in 36 cities, allowing banks like Industrial & Commercial Bank of China Ltd. and China Merchants Bank Co. to grab all the inflows. To cement their lead, the banks are offering everything from cash incentives to free ibuprofen for each new account.

“The first bite at the cake here won’t be easy” for foreign companies, said Zhou Yiqin, president of GuanShao Information Consulting Center, a financial regulations specialist.

While it’s still early days for the new pension scheme, the head start for domestic companies illustrates the daunting challenges for global firms eyeing a piece of China’s $60 trillion financial services sector. From mergers advice to stock sales and trading, Wall Street is struggling in a market that combines endless potential with stiff local competition and regulatory roadblocks.

China’s fledging private pension system is loaded with promise, as Beijing desperately tries to entice retirement savings to support an aging population. The number of people over 60 is expected to jump more than 50% by 2040, according to the World Health Organization. China’s population shrank last year for the first time in six decades.

To address the problem, China has launched three pension pillars. The first two — a compulsory state-backed plan and a voluntary corporate matching option — don’t come close to meeting the future needs of most pensioners. Savings in the government-led program covering urban employees may run out by 2032 and face a shortfall of more than 7 trillion yuan by 2035, according to Citic Securities Co. estimates.

The new private offering aims to fill the void, allowing clients to contribute up to 12,000 yuan a year in tax-sheltered plans, similar to Individual Retirement Accounts (IRAs) in the US that have become a $13 trillion market. The private pillar is estimated by Citic to grow to 12 trillion yuan by 2035, equal to the two other plans combined. UBS Group AG estimates the market could be worth $25 trillion by 2060, more than a third of China’s gross domestic product by then.

Competition among the 23 pilot banks that can open these accounts — all Chinese — is heating up. Some managers are dangling 50 yuan in digital envelopes — or hongbao — to win customers. Others offered ibuprofen, the Advil-brand fever medicine that was in short supply during the pandemic, while Postal Savings Bank of China Co. runs draws with a 600 yuan top prize.

Read more: China’s Long-Delayed Plans to Hike Retirement Age Go Viral

Deng is among 28 million residents — more than the population of Australia — who have opened new accounts as of March 2. The program attracted 14.2 billion yuan in the last two months of 2022 alone, according to official data.

The new plan is an attractive niche for asset managers since the tax breaks appeal to high-income earners and the money will be locked up for years with the same firm. Once a client opens a pension account with a bank, they can only invest in eligible funds distributed by that lender. That’s a rare, government-sponsored opportunity in China, where fickle investors are notorious for switching investments and banks.

“The quality of this cake is much better than that of the regular type,” said Sun Bo, head of pension investment at Beijing-based China Asset Management Co., controlled by Citic Securities.

So far, most international firms’ wholly-owned businesses have been unable to join the pension party. They either lack sufficient assets to meet thresholds set by Beijing, or they’ve only recently won regulatory approval — often after lengthy delays — to buy out local partners to sell their own funds.

BlackRock Moves

BlackRock, with about 6 billion yuan in mutual fund assets, still hasn’t issued any products under the new program even though its wealth management joint venture was allowed to join given its experience with a previous trial. The New York-based giant attracted just 158 million yuan in the earlier push with partners China Construction Bank Corp. and Singapore’s Temasek Holdings Pte.

“If a ‘Big Brother’ like BlackRock can’t adapt well in China, it would serve as a mirror for other global managers to gauge their own prospects” for pension funds, Zhou said.

BlackRock didn’t reply to a request for comment.

BlackRock, Defying Soros Warning, Breaks New Ground in China

Other money managers such as Fidelity and Neuberger Berman Group LLC, which gained approvals for stand-alone units last year, are just starting to build onshore assets to meet the minimum thresholds. JPMorgan Chase & Co. and Morgan Stanley have been in China for decades but only won approval in recent months to buy out their partners and ramp up their independent operation. JPMorgan has two funds in the trial via its joint venture.

“The pension market is one of the biggest opportunities for our onshore business, considering China’s demographic change and tremendous need for retirement investments,” JPMorgan said in a statement to Bloomberg.

Morgan Stanley declined to comment.

For the new entrants, meeting the thresholds may take time. Only retirement-target products with at least 50 million yuan in average assets over the past four quarters — or at least 200 million yuan in the recent quarter — can qualify. To start selling retirement-target funds, the firms need to be in operation for at least two years, and run a mutual fund business of at least 20 billion yuan.

These thresholds may be relaxed over time to entice more foreign players, UBS analyst Cao Haifeng told reporters in Shanghai.

“If they get to participate in the domestic market, with investors warming up to their products, that should help facilitate China’s capital market development,” Cao said. “It’s going to be a win-win.”

In the meantime, firms such as Credit Suisse Group AG and Schroders Plc are getting some pension revenue from their minority stakes in joint ventures though that’s not as lucrative as wholly-owned businesses like BlackRock’s that can pitch their own funds.

Read more: China Moves a Step Closer to a National Pension System

Winning over Chinese consumers won’t be easy as local banks tend to favor their in-house funds over rival products, Zhou said. Deng chose her lender — Bank of Shanghai — because a relative who works there needed to fill his quota. She even won a 50 yuan prize.

Invesco Ltd.’s fund venture shut down one of its retirement-target funds after its assets dropped below a minimum 200 million yuan threshold following losses last year. Goldman Sachs Group Inc.’s first wealth management product — not in the pension space — raised just $21 million, a fraction of the industry average.

Global firms “must move faster” if they want a bigger share of the market, said Sun at ChinaAMC. While foreign players are often better at product design and asset allocation, they lack brand recognition and need to understand the bank-dominated distribution network, he said.

The slow rollout could test global managers’ commitment to China as they face years of losses before building up scale, and it’s unlikely any foreign commercial bank will be selected for the trial, according to Zhou at GuanShao. He cited Citigroup Inc., which announced in December it will wind down its consumer bank in China as part of a wider retreat. Vanguard Group Inc. scrapped plans in 2021 to set up a wholly-owned fund business and now plans to exit the country entirely, people familiar told Bloomberg News.

Read more: Vanguard Said to Shutter Business in China, Exit Ant Venture

Still, global players have plenty of time to catch up in a market that will take years to develop, said Harry Handley, a senior associate at Z-Ben Advisors Ltd., an asset management research firm in Shanghai.

“It was highly unlikely that foreign firms would be welcomed into the market from the very beginning and few are in a position to execute on the opportunity,” he said.

Even with the slow start, Wall Street firms appear committed to the pension space in the world’s second-largest economy. Fidelity says pensions are “in their DNA” and are an integral part of their China focus.

“In due course, leveraging Fidelity’s extensive experiences in managing pension investments for clients around the world, we aim to offer pension solutions to Chinese investors to enhance their retirement readiness,” the company said in an emailed statement.

–With assistance from Amanda Wang.