Citic Capital planning mutual funds business

The Hong Kong ventureƆs real aim is back home in China.

Citic Capital intends to launch a retail mutual funds business in Hong Kong around the fourth quarter, with the ultimate aim to establish international expertise for a future asset management business in China.

Citic Capital is the re-branded investment banking operation Citic Ka Wah Bank plus Cargary Securities, a retail brokerage house. Mainland red-chip parent China International Trust & Investment Corporation bought a direct controlling interest in early 2000 to increase cooperation with its own banking and brokerage operations.

Zhang Yichen, previously executive director at Citic Pacific (the parent's Hong Kong industrial subsidiary) where he headed its telecom business as well as an ex-banker at Merrill Lynch, has recently moved to assume the role of Citic Capital's deputy CEO, where he is overseeing the day-to-day implementation of the new business strategy.

He says the first products in Hong Kong will probably be guaranteed funds and other conservative, passive products. "As we build the team our products will become more active," he says. Zhang acknowledges the firm is a latecomer to the Hong Kong mutual funds market. "We will offer a good, simple product that we can then build on."

The firm is relying on the distribution power of both Ka Wah and Cargary. "Getting distribution access is critical," he says.

Nonetheless the company realizes the Hong Kong mutual funds business is already overcrowded, with tiny margins and cutthroat offerings on product and pricing. But more important is to build a successful business that can serve as a platform to later enter the nascent Chinese mutual funds industry.

Explains Zhang: "Starting a business in Hong Kong will allow us to build our capabilities, internal processes and procedures. You can't gain that kind of experience and infrastructure without simply doing it." Once that is accomplished, Citic Capital will be in a position to hook up with the parent's domestic siblings such as Citic Securities and offer funds expertise.

The group's only exposure to China's funds industry now is a 25% stake held by Citic Securities in Changsheng Fund Management. The regulators in Beijing have made it clear that any fund management company must have multiple parents, in order to put an end to several market manipulation scandals from 2000. This limits Citic Securities' ability to participate in the growing funds industry.

Citic Securities is also held back by a lack of overseas experience and know-how regarding mutual funds. But it has enormous brand name recognition and distribution prowess. It could overcome this by teaming up with a foreign fund manager, but that raises issues of control. Moreover, with the Citic name, Citic Securities does not need to rely on a foreigner for a brand name.

The obvious partner, then, will be Citic Capital, once it has got some experience in fund management under its belt in Hong Kong. This is not a unique strategy. BOCI-Prudential Asset Management is a joint venture between Bank of China International and Prudential of the UK formed in 2000 for similar purposes. It successfully entered the Mandatory Provident Fund market and now has around 10% of market share, and at the start of this year launched its first retail mutual fund.

If Citic Capital's entry into the local funds scene is a success, it will make Citic Securities a most powerful competitor in the future of China's asset management industry - with perhaps Bank of China its biggest domestic rival.

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