Aviva exits China funds sector amid rising competition, falling assets

A man walks past an AVIVA logo outside the company's head office in the city of London March 5, 2009.

SHANGHAI (Reuters) - British insurer Aviva Plc (AV.L) has exited China's struggling $380 billion mutual fund industry, a source said, becoming the second foreign investor this year to abandon the once must-go destination for global asset managers.

Aviva ended this month a five-year effort to win a fund license in China as it quit a planned asset management venture with Central China Securities Co, the source who had direct knowledge of the deal said.

In Aviva's place, UK-based money manager Ashmore Investment Management (ASHM.L) will partner Central China Securities in the fund joint venture, China's securities regulator said. The venture still awaits regulatory approval.

Aviva's retreat comes about six months after Belgian financial group KBC Group SA (KBC.BR) pulled out of its China fund venture and underscores divergent views foreign investors have on the business in the mainland.

"Aviva started seeking a fund license in China since 2007 and has now quit partly because it got a bit impatient and also because China's fund market may be less important in Aviva's global strategy," said the source, who declined to be named because he was not authorized to talk to the media.

Aviva declined to comment on the joint venture. "The Chinese market remains of great interest to Aviva Investors and we will be considering the best way to cover the local institutional market going forward," spokeswoman Angela Warburton said in an emailed response to a Reuters query. Aviva Investors is the funds unit of Aviva.

The insurer, Britain's second biggest, in July unveiled plans to sell or close more than a quarter of its businesses in a shake-up aimed at regaining the support of investors irked by the group's flagging share price.

The pullback from the China fund business could be linked to that, one analyst said. Aviva currently owns a life insurance venture in China with the country's top grain trader COFCO Group CNCOF.UL.

SHRINKING ASSETS

Foreign financial firms, including leading ones such as HSBC (HSBA.L), Morgan Stanley (MS.N) and UBS (UBSN.VX) have jumped into the Chinese funds market over the past decade, lured by the promise of economic growth and rapid wealth creation.

But while the number of funds on offer has more than tripled since 2007 to over 1,000 now, the industry's total assets are down by a quarter over the same period, reflecting in part the sliding stock markets. That has led to intense competition among the 73 players in the industry.

China's main stock market index .SSEC is down 60 percent over the past five years. Around 55 percent of China's total mutual fund assets are in equity and balanced funds.

Foreign investors are also handicapped by their stakes being limited to 49 percent in joint ventures under Chinese rules, leading to their ceding control to local partners.

"China's fund industry is suffering, and life is hard for new entrants," said Howhow Zhang, head of research at Shanghai-based fund consultancy Z-Ben Advisors.

But some money managers, such as Ashmore, remain optimistic on China.

"We have been looking for some time to expand our footprint in China," emerging markets-focused Ashmore said in a statement, adding the new venture, to be named Ashmore-CCSC Fund Management Co, will be based in Shanghai.

(Additional reporting by Nishant Kumar in HONG KONG, Chris Vellacott and Tommy Wilkes in LONDON; Editing by Muralikumar Anantharaman)