After more than five years at Société Générale Asset Management’s joint venture in Shanghai, it is hardly surprising that newly promoted CEO, Asia Pacific Denis Lefranc’s strategy has China at its heart. Now based in Hong Kong, Mr Lefranc believes that warming relationships between the mainland and Taiwan will create a huge opportunity for firms that can embrace Greater China as a whole – understanding the commonalities and the differences across the region.
In May, Taiwan elected President Ma Ying-Jeou, an advocate of closer relations with China, which led to a relaxation of the long-term policy restricting Taiwanese investors from participating in China’s growth. Investors were limited to 0.4 per cent of their portfolio in Chinese stocks and 10 per cent in Hong Kong. Under Ma’s administration, there is now no restriction on investing in Hong Kong stocks and a 10 per cent maximum into China A-shares.
Institutional opportunities
“We strongly believe that you have a lot of business opportunities in Greater China,” Mr Lefranc says. “Before it was a little bit of theory, now it has become something serious: of course for the retail market, and more and more for the institutions…if you have a big opening for the retail, you are going to have consequences for all the tier one institutional customers, and the tier two, the insurance companies and so on. So this is one of our strategic business developments, to really push all these synergies between Taiwan, Hong Kong and mainland China.”
Not only does Mr Lefranc believe that this thawing is the start of a long term opportunity, but that it marks the tip of the iceberg, as the cultural links between Taipei and the mainland could create a flood of business. Unlike Hong Kong, Taiwan shares a language with the mainland, and many in Shanghai and Beijing consider Taiwan to be ‘more Chinese’ than the Special Administrative Region.
Taiwanese businessmen already have significant presence in China, where regulations allow, and more will undoubtedly follow.
“This is in the interest of mainland China,” Mr Lefranc says. “The Taiwanese banks can have stakes in Chinese banks and now the Chinese banks can do the same. I’m not a banker, I am a poor fund manager, but you are probably going to see in the near future some cross investment. This is a first step, and China has a strong interest to do so.”
That is not to say that Hong Kong will be excluded. SGAM has its headquarters in the SAR, and Mr Lefranc maintains that it will be the centre for the business on Greater China. The China Securities Regulatory Commission recently altered its rules so that Chinese fund managers can open offices in Hong Kong.
“It means that all the non-mainland Chinese investments are likely to be driven through the Hong Kong office, for various reasons: regulatory, foreign exchange controls, etc,” Mr Lefranc says.
“I think mainland China for many reasons – again, the foreign currency controls – cannot really compete with Hong Kong in terms of global business.
“It’s the same for the Taiwanese. All the big Taiwanese financial institutions have a subsidiary in Hong Kong.” There are still grey areas in terms of the regulation, but Mr Lefranc believes that Hong Kong has a natural role as a broker between Taiwan and the mainland.
Regulatory differences
Despite the prospects for integration in Greater China, the regulatory differences between its constituent jurisdictions remains an issue. To operate in Taiwan, for example, requires setting up an advisory agreement and delegating the execution of investment ideas to a local fund manager. In China, asset managers are forced to enter into joint venture.
Mr Lefranc was involved in identifying a partner for, and later running, SGAM’s JV, and says that choosing a partner for their alignment with the eventual business strategy is more important that going for a big-name player. SGAM signed a deal with Fortune Trust, a subsidiary of Baosteel.
“I remember at the time everybody was thinking that SG is crazy, they are making a JV with a steelmaker,” Mr Lefranc says. “But in fact, it was the strategy. The company was very efficiently managed and we didn’t want to be married to a securities company with an exclusive link with one distributor. We wanted to be able to work with all the big banks in China.” Currently, only Fortune SGAM has its funds distributed by all three of the major domestic Chinese banks.
The discrepancies between the different markets does mean that a homogenous strategy for the region is virtually impossible, Mr Lefranc concedes, but, he argues: “You can have a community of interest for real Greater China products invested in all three markets. After that, the business plan is much more based on marketing and sales leverage.”
Later on, with the community SGAM builds, it hopes to attract these same customers to take a more global investment view. And even if this proves difficult, the growth in the Greater China story itself has a long way to run.
CV
Denis Lefranc CEO, Asia Pacific, Société Générale Asset Management
1989 -1992: Auditor, Council of the Regulatory Authority of the Financial Futures Market
1992-1997: Legal division, Société Générale
1997-2000: Head of legal and compliance, BAREP
2000-2003: Head of legal, SGAM Position
2003-2008: Deputy CEO, Fortune SGAM Fund Management, SGAM
2008-present: CEO, Asia Pacific, SGAM
