Of all the financial-services opportunities in China, none is more tantalizing than asset management. Fueled by the investment, retirement, and insurance needs of increasingly affluent Chinese consumers, the sector has grown at a rate of more than 60 percent annually for the past three years. We estimate that assets under management will rise at a rate of 24 percent annually for the next decade, making it the fastest-growing segment of financial services in China—and the world (Exhibit 1).

Multinational financial-services companies can’t ignore this market, but capturing a large share of it won’t be easy. More than 27 foreign asset managers have entered China in the past five years, through joint ventures and minority stakes, but most face significant challenges despite the recent high returns. (Chinese law restricts foreign participation to partnerships with Chinese companies, and foreign ownership in an asset manager is limited to 49 percent.) For one thing, Chinese investors are extraordinarily fickle: many shift their holdings out of any given mutual fund within six months. In fact, almost all funds lose the bulk of their assets under management after two years, so companies...