Analysis of Custody and QDII in China

Background:

The security related services of commercial banking is a middle business based on the security investment. The US bank started dabbling in this area since 19 century. Along with the increasing of securities quantity and variety, for controlling the cost and marginal profit, concentrating on developing the market, the investment institution delegated such business to professional institution. Based on such background, the investment security service, different with traditional banking business, from a simple reconcile and custody business to a highly sophisticated investor service business has been rapidly developed in the previous 30 years.

I am working in the JPMorgan Chase Bank, worldwide security services division. Our main custody business clients are insurance company, direct invest institutions, bank, pension fund, QDII Fund. JPMorgan is the biggest custody bank in this world owns about 1.12 Trillion US dollars assets. In mainland China, custody is a very new business for JPMorgan starting from 2007. We own the license of QDII which is call the “Qualified Domestic Invest Institution”. From the starting point about 18 Billion RMB custody assets, in 2013, there are more than 80 Billion RMB custody assets in China mainland. Rapid growth is good news for every business but potentially there are potential risk in this competitive industry and JPMorgan is brand new comparing with such old bank: HSBC, Citic group and Standard Charter.

Analysis:

I use a SWOT model to analyze the current internal/external situation for JPM’s custody business in China.

Strength:

Advantage of price:

Management fee and Custody fee are the main income on the custody services. Such rates are agreed between JPM and investors. However, when there are huge amount of the custody asset from client, such rates can be negotiated as well. Because from bank’s point of view, custody asset can be treat as a deposit. Deposit is the blood for a bank. So to gain as more deposit as possible, such sacrificing is necessary. JPMorgan’s aim is always to attract more assets without think the fee rate.

Strong support:

The worldwide biggest information centre of JPMorgan is based on Mumbai and the second biggest in based on Manila. There are more than 10 thousand employees working in Mumbai. Such centre covers the whole world’s security services like pricing, security setup, reconcile, accounting, trades input and so on. When never the inquiries come, they will respond sharply.

Weakness:
Influence in China:

JPMorgan has started the banking business in China since 1985. Comparing with those HSBC, City group and Standard Charter, its history is very short which cause a point of view to the customer, who is JPMorgan, I am aware of HSBC/City, I would prefer to invest there.

Relationship with government:

Due to the short history in China, JPMorgan is still required to put more concentration to take care of the relationship with government. To gain one more license for the QFII will mostly overwide the business of custody in China.

Opportunity:

Development Space:

Custody is a very new business of China. Such cake has still not been yet finished sharing.

Development new client:

It should not only stick for the existing client like fund/insurance company. Instead of that, JPM should develop more potential institution that is interested into investing in global market. Such financial institution owns bigger amount of fund than those insurance company/ fund.

Threat:

No Money!

Various reasons cause the lack of fund, especially because of the control of government. SAFE and other regulators set the quota for each investment institution for oversea investment.

Lack of confidence:

After the Financial storm in 2008, the domestic investors’ confidence is still in a process of restoring. The fluctuation of oversea security market causes the cautiousness of investing especially for Chinese investors.

FX rate

As we are aware, most of QD funds are settled in RMB but investing in USD or other currencies. Then due to the increase CNY/USD fx rate, the income was depleted due to the FX.

Recommendation:

More understanding of oversea market:

Lots of fund managers are lack of oversea security market working experience, lack of forecasting and understanding the market trend, lack of decision making for the incident situation.
In this case, I strongly recommend the institution hire more fund managers with oversea experience and had some deep study in the oversea market.

Create good relationship with local government:

To be success in a country, maintain the good relationship of the local government is very crucial. JPMorgan should put more concerns on this part and also follow the local regulators’ regulations to avoid the breach of compliance.

FX rate risk：

Purchase the forward currency contract to hedge the risk. Adjust the financial report in liabilities and financial expenses.

Conclusion:

Based on the research above, we can conclude that: JPMorgan still can create and attract more custody business in China mainland. However, it still requires the good relationship with government, strong internal control, deep understanding of oversea market, cultivating the history and experience and the ability of avoiding FX risks.