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Asset managers that aspire to crack the potentially lucrative Chinese retail market have a long road ahead, with distribution one of their core challenges, says Moody’s Investors Service.

In a new report, the rating agency examined the prospects for foreign firms breaking into China’s retail investment markets following measures to open the sector to greater outside participation, including lifting the limits on foreign ownership of fund managers.

“Retail demand for traditional asset management services is growing rapidly,” Moody’s said, noting that total assets under management were US$16 trillion as of June 2020.

The rating agency said that it expects the sector to “continue to grow rapidly, fueled by increased demand from both retail and institutional investors.”

To take advantage of the opportunity, Moody’s said that it expects foreign firms to create subsidiaries in China that are either wholly controlled or majority-owned to target retail investors.

Yet Moody’s cautioned that it will take time for foreign players to realize profitable growth.

“Overseas players will need to make a long-term commitment,” the report said. “Building a profitable Chinese operation is a long-term endeavor requiring solid balance sheets and surplus cash, even for large groups with substantial experience and expertise.”

The firm noted that it will take “time and upfront investment for foreign players to build up local relationships and a track record of good performance, while simultaneously adapting to a new and changing regulatory environment, and a different set of customer expectations.”

Moody’s also stressed that the distribution model will be crucial, given that banks generally control asset management distribution in China.

While domestic banks represent logical potential partners for foreign firms, Moody’s said that some are looking for alternate routes into the market.

“Some asset managers have partnered with local internet platforms, which have also emerged as a key distribution channel because of their large and highly diversified consumer base,” the rating agency said.