Larry Fink identifies China as critical BlackRock priority

CEO outlines opportunities created by Beijing’s reforms in annual shareholder letter

Larry Fink
David Orrell | CNBC
Larry Fink

Larry Fink said China was a top BlackRock priority after Beijing last year granted foreign asset management companies greater access to the world's second-biggest economy, even as trade tension between China and the US are ratcheting up.

In his annual letter to BlackRock's shareholders, seen by FTfm, Mr Fink identified three main trends that could "dramatically reshape our firm and our industry" — changes to the global retirement market, the increasingly powerful role of technology, and opportunities in China.

More from the Financial Times:
BlackRock to offer funds that exclude gun makers, sellers
Will BlackRock's algorithms beat the fund managers?
Wall Street's 'top cop' keeps companies on toes over hack attacks

"One of the most critical priorities for BlackRock today and into the future is increasing our presence and penetration in high-growth markets around the world, particularly in Asia and especially China," Mr Fink wrote in the letter that is due to be published on Monday. "Demographic, economic and regulatory shifts — including high savings rates and rapid growth in household financial assets in these markets — will create significant opportunities."

China has historically held foreign banks and investment groups at arm's length, restricting local operations and investment activities. But in November Beijing said international asset managers would soon be able to own up to 51 percent of a domestic fund management company, and 100 percent in three years. Ownership is currently capped at 49 percent.

BlackRock last year received a "private fund management" registration that allows it to make and distribute investment products to qualified Chinese investors, and will by the summer launch a quantitative fund investing in Chinese equities, according to people familiar with the matter. But PFM licenses come with some limits on who can invest, restricting it to wealthy individuals and institutions.

In contrast, "fund management company"licenses allow the sale of mutual funds to locals, and "this latest regulatory opening [on FMC's foreign ownership limits], together with other recent market developments, could significantly expand the prospect to grow our footprint," Mr Fink wrote.

Only $471bn of BlackRock's $6.29tn of assets under management is in the Asia-Pacific region, which accounted for $653m of the company's $12.5bn revenues last year — although the Asian number is probably undercounted due to how iShares is accounted for.

The New York-based company's Chinese expansion is being spearheaded by Ryan Stork, the Hong Kong-based head of Asia-Pacific, and Geraldine Buckingham, global head of corporate strategy. It has 30 staff based in China — one of the biggest teams of any foreign asset manager.

The investment company already has a joint venture with Bank of China Investment Management, but people familiar with the matter said that BlackRock was undecided whether to apply for one of these new licenses through its JV, its wholly foreign-owned enterprise in Shanghai, or through a new partnership.

In a recent blue paper on the asset management industry, Morgan Stanley and Oliver Wyman identified China as "by far" the biggest opportunity for investment groups in the coming years, given the "sheer scale" of China's financial sector and the country's extensive trade links and surpluses, which generate capital that need to be invested. The paper estimated that the pool of Chinese savings will swell from $20.8tn at the end of last year to $25.9tn by the end of 2019.

China's mutual fund industry could rise to $7.5tn by 2025 — nearly half the size of the US market today — as the country scales back restrictions on the activities of international asset managers, according to UBS. The pool of fees for running Chinese mutual funds would expand fivefold to $42bn over the same period, the bank estimated.

Nonetheless, Mr Fink cautioned that asset managers would have to be prepared for the long haul in China, predicting it would take many years for international groups to establish themselves in the domestic asset management industry.

"It will require time and patience as we continue to watch this market evolve," he said. "We are preparing to bring our expertise in investing, risk management and technology, as well as our ability to understand the needs of local clients, to bear if and when the market opens further."

Receive 4 weeks of unlimited digital access to the Financial Times for just $1.