and seek to take our market share. Even so, we will still have our first-mover advantage and our fees are still 2/3 of theirs.
Industry Growth
The Chinese wealth management sector has increased dramatically over the past 3 years.
As such, Parsec International, and other competitors, are increasing their capacities in order to meet this growth. And it is highly likely that this growth will continue at the present rate, and it is forecasted that the supply for wealth management may not keep up with increases in demand. But in the future, Parsec International may face heightened competition (because of attractive market conditions) and be unable to obtain enough new business to maintain our revenue volume and profit margin.
However, it is highly unlikely that the Chinese wealth management market will be over-saturated anytime soon. There is a growing demand and even higher barriers to entry.
Current forecasts show that hyper-competition should not be a problem.
Environmental Risk
Economic
The economic risks affecting Parsec International are the recent financial crisis and the highly publicized Madoff scandal. The best strategy for Parsec is educating our investors about the financial crisis and discussing realistic expectations clients should have regarding Parsec portfolio returns. According to the Boston Consulting Group, Chinese customers are bipolar in nature; some investors crave risk and others adamantly avoid it.
One way to effectively deal with the different preferences of Chinese customers is to educate investors about the long-term advantages of choosing a moderate, calculated and steady way to invest. Another possibility is to satisfy the appetites of investors that are attracted to high-risk/high returns.
After diversifying these clients portfolios, a new segment might be developed that will delegate some funds into higher risk, higher return investments. The only problem with serving these risk-hungry customers is that some very-risky financial products are not allowed by the Chinese government. However, these prohibited, more risky financial instruments are not the current competitive advantage of Parsec International and offering them could possibly hurt our brand image. Therefore, before offering any different products designed specifically for Chinese clients, our research and selection will go through a rigorous process. Therefore, we will stay with our core competency of portfolios containging both US equities and US Treasury bonds.
The Madoff scandal was highly publicized and may potentially scare off Chinese investors from investing with a small company like Parsec. Parsec International will assuage their fears by proving to customers that we do not have access to their funds, as their funds are held in a custodial account. We are only granted a management capability.
Having a partner like XIB will help significantly to soothe clients’ concerns as to any potential Madoff like scandal.
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Parsec International has secured planning, good management, and sufficient insurance coverage to protect against catastrophic events such as fire, floods, high winds, identity theft, errors and omissions, foreign exchange risk, credit risk or hurricanes. Despite these precautions, a major natural disaster or operational error could affect our business by causing disruptions in service or harm to our brand image. In addition to purchasing insurance, Parsec International will take all necessary precautions to prevent any of the above measures from happening.
Legal & Government
The Chinese regulations that impact our business include QDII (Qualified Domestic Institutional Investor) and ECFA (Economic Cooperative Framework Agreement).
According to the Asia Times, Chinese individuals can invest directly into the stock markets of the United States through China’s Qualified Domestic Institutional Investor (QDII) program, following the signing of an MOU (Memorandom of Understanding) agreement by the China Banking Regulatory Commission (CBRC) and the US Securities and Exchange Commission (SEC). This opens up a completely different and diverse market to Chinese consumers. But with opportunities come threats.
QDII still has the following regulatory qualifications:
Regulations for the Securities Firm
For a securities firm, its registered capital must not be less than RMB 800 million ( USD
$114 million); the ratio of its registered capital and net assets must not be lower than 70%;
it must have been in the collective investment schemes business for more than one year;
and the amount of funds it manages by the end of the latest quarter must be at least 2 billion RMB ( USD $285 million). Xiamen International Bank fulfills these requirements and has already been cleared for QDII investment.
Regulations for the Foreign Financial Advisors
Any QDII foreign hired investment advisor to help with overseas securities investment must have managed at least USD $10 billion dollars in the latest fiscal year and have operated in the investment management business for more than five years. These requirements are relaxed if the advisor is an overseas branch of the appointing securities-related institution. However, the relationship that Parsec Financial will retain shall be through a purchased weekly research report. The report will state the actions that Parsec Financial will take, and then Parse International can act accordingly. The actual funds will be managed by Parsec International based upon the research reports of Parsec Financial. In this manner, Parsec International’s portfolios will exactly follow Parsec Financial’s, but without having to fulfill the USD $10 billion AUM requirement (yet still remain within QDII regulations).
Moreover, the overseas branch must have been incorporated in a jurisdiction where the securities regulatory authorities have signed a Securities Regulation MOU, and maintain an effective cooperative relationship with the CSRC. (The US has signed said MOU, so this is not a problem.)
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Custodian Requirements
A QDII securities institution must appoint a qualified PRC (People’s Republic of China) bank as the custodian of its assets, and the PRC custodian may appoint, to hold custody of overseas assets, a foreign custodian agent that has paid-in capital of no less than US $1 billion, or assets under custody of no less that US $100 billion (i.e. Charles Schwab).
In Parsec’s case, Xiamen International Bank will be our joint PRC bank, and Charles Schwab will be the internationally appointed custodian of all overseas assets. Both of these institutions comply with QDII custodial regulations
Regulations for Investments
Investment in securities should not exceed 50% of the net value of the total assets of the relevant financial product.
Investment in a single security should not exceed 5% of the net value of the total assets of the relevant financial product.
The minimum investment in such product by a single client should not be less than
$300,000 RMB (or its equivalent in foreign currency).
Clients should number more than two and altogether have invested at least RMB $100 million.
The target client should have sufficient investment experience in public securities.
Banks must give clients appropriate and timely disclosures with respect to such offshore investments.
Strictly monitor the sales activities of sales personnel.
Give due regard to an investor’s investment objectives and instructions.
Maintain prerequisite policies and procedures applicable to banks with respect to internal compliance and risk management.
Parsec’s View
If the Chinese can open up regulations, they can also close them as well. In the unlikely event that QDII goes backwards, this could work for, or against Parsec International. On the positive side, once Parsec International enters China, we might be “grandfathered” in under any regulations that are tightened later, lessening their effect. However, if the Chinese government unilaterally decided to close investments to the US, there are some alternatives.
Parsec International would have to be quick, but as a small and flexible company, we are ready to adapt to change. If money cannot flow out under newly regulated QDII, it may still be able to flow into China under QFII (Qualified Foreign Institutional Investor).
Although, investing into China’s markets is not our core competency, we will have the necessary infrastructure, and knowledge, to invest money from the States into China.
If QDII were to be closed and Parsec International was forced to operate under QFII, we could turn lemons into lemonade. Parsec International could be the link for many
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American firms that want direct access to the Chinese equities market. In fact, according to the Christian Science Monitor, for a brief period in mid-July 2009, China’s stock market edged out Japan’s as the world’s second-largest exchange. Then, Chinese stock prices tumbled some 20% in August 2009, placing Japan back on top. However, within the next ten years, James Trippon, editor and owner of China Stock Digest, hypothesizes that China’s stock exchange will surpass not only Japan’s, but also the NYSE, becoming the world’s largest equity market. This provides an excellent back-up plan if QDII were ever severely limited.
A quick switch from a QDII to QFII would be certainly no easy feat and we do not wish to make this decision rashly. The point here is to illustrate that Parsec is ready for extreme changes in Chinese governmental regulation and has already started scenario planning to deal proactively with any regulatory movements.
Economic Cooperation Framework Agreement ECFA
The other major regulation that is on the table between Taiwan and China, which could have a grand effect on Parsec International, is ECFA or the Economic Cooperation Framework Agreement. According to Taiwan’s Ministry of Economic Affairs, ECFA would most likely internationalize Taiwan’s investments, trade and overall economy.
EFCA is not merely a free trade agreement, nor is it an agreement akin to what China has with Hong Kong and Macao. The closest agreement (for comparison reasons only) would be that of the European Union with, perhaps, a converging currency, investment protection, intellectual property protection, lowered tariffs and the elimination of double taxation. It should be noted that ECFA does not violate the spirit of the World Trade Organization (WTO).
The signing of ECFA would have many positive effects on Parsec International’s business practices. On a micro-scale, we would be able to directly hire Taiwanese financial advisors that already have an in-depth knowledge of the local culture, and whom come from a culture of financial and investment sophistication. Taiwanese employees are the perfect bridge between Parsec International and the Chinese people;
the signing of ECFA would be the beginning of building this bridge.
On a macro-economic scale, signing ECFA would open the possibilities of Parsec International cooperating with a Taiwanese bank to open a wealth management business in China. It would allow Parsec to seamlessly move between Chinese and Taiwanese entities, each possessing their own unique strengths for our business model. It might also allow us to share a smaller portion of our fees if Parsec were teamed with a Taiwanese bank.
Presently, ECFA has not yet been signed and is not 100% guaranteed to be signed in the future. And even if ECFA were signed, it is an “agreement framework” for which regulatory and economic agreements would derive their structure. Simply signing ECFA does not immediately open Cross Strait relations. But with Taiwan and China actively talking about ECFA and its implications, it is definitely on the radar of Parsec International’s scenario planning. Currently, Parsec does not require the signing of
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ECFA to operate a profitable business. However, Parsec International will position itself to take advantage of the enormous implications such an agreement would entail on both a macro and micro level.
Parsec International is perpetually keeping abreast of all legal and regulatory issues facing Cross Strait relations and the Chinese financial regulatory environment. We will actively design scenario plans for all relevant possibilities.