Why US investors are still finding it tough to crack the Chinese market

As fund managers globally struggle with lower fees and the rise of passive investing, China has emerged as the industry’s next holy grail. But while the opportunities are immense, foreigners won’t find it easy.

International firms from UBS Group AG to BlackRock Inc. and Fidelity Investments are jostling for a share of what’s expected to be the world’s second-largest asset-management market behind the U.S. by 2019, attracting half of all net new flows. Already worth more than 12 trillion yuan ($1.9 trillion), growth has been explosive, driven in part by Beijing’s push to give investors an institutionalized option outside of risky wealth-management products.

For offshore players, there are two ways to tap the market.

The first, and more traditional, is via minority joint ventures. Of China’s 113 fund managers, 45 fall into that category. Within that group, most foreigners are moving fast to increase their interest to 51 percent after Beijing changed the rules to allow for majority control in April. UBS, Nomura Holdings Inc. and JPMorgan Chase & Co. have all submitted applications.

As of 2016, overseas companies can also set up wholly owned foreign enterprises, which are allowed to sell private securities and which are only open to institutions and high-net-worth individuals. Eleven global firms have registered such vehicles, according to research firm Cerulli Associates. Fidelity was the first to start selling funds that way in January last year.

But that still doesn’t make China an easy market to crack.

For one, private funds aren’t allowed to market their products publicly, so it’s hard for international firms to build a name for themselves, particularly when it comes to selling mainland stocks. Some have taken to publishing their strategy views on platforms such as WeChat or Ant Fortune. There are still many more share research analysts employed by local companies, however.

Foreign firms also tend to be stricter about the kind of clients they take on and will conduct more stringent background checks, according to Cerulli Associates’ senior analyst Miao Hui. While tougher compliance standards may limit risk, they’re not a client-grabber. Staffing is another difficult issue, with the pool of experienced fund managers relatively small.

Ultimately, expect China’s funds-management market to remain dominated by local players, similar to in the U.S., where American money managers reign. Still, as investors get more sophisticated, Western players may find an edge. And in any cutthroat industry, having a defensive strategy is always useful.