State Street (NYSE:STT) will soon start offering fund management services in China through a joint venture with the Chinese trust firm Zhongrong International Trust Co.  This decision by the global custody bank follows in the footsteps of a large number of international financial institutions who have gained entry into the country by going the JV route – leaving one to wonder why State Street waited so long to make the move. But well, better late than never. Especially when it comes to something as lucrative as China’s swelling fund-management industry.
We maintain a price estimate of $51 for State Street’s stock, which is at a premium of about 10% to current market prices.
Over recent years, the Chinese government has relaxed its grip on the country’s once tightly regulated financial sector. Although current regulations still disallow international financial firms from holding a majority stake in companies, the world’s biggest banks hardly see that as a reason to stay away from the world’s second largest economy.
It is, hence, no surprise that of the 73 fund management companies in China, 39 were formed as a joint venture between a local firm and a foreign financial giant. 17 of these joint ventures have stakes split as 51:49 between the local and foreign player. 
The latest JV between Zhongrong International and State Street’s Hong Kong unit also follows the 51:49 model and has a registered capital base of 300 million yuan (~$50 million). The newly formed company should go a long way in helping State Street establish its fund management business in the region. We believe that the high demand for ETF products in China is what will largely contribute to growth in the size of State Street’s assets under management in the country.
Other notable JVs formed by U.S. financial institutions include Morgan Stanley Huaxin Fund Management Co. (34% stake held by Morgan Stanley), China International Fund Management Co. (49% stake held by JPMorgan), BOC International Investment Managers (16.5% stake held by BlackRock) and BNY Mellon Western Fund Management Co. (49% stake held by BNY Mellon).Notes:
- State Street Plans Fund-Management Joint Venture in China, Fox Business, Nov 21 2012 [↩]
- List of JV Fund Management Companies, China Securities Regulation Commission Website [↩]