By Charles Gubert reporting from FundForum 2015
The enactment of the China-Hong Kong Mutual Recognition Scheme will bring about significant opportunities for asset managers but firms have been warned there will be challenges ahead with the initiative.
Mutual Recognition, which has been in the pipeline for more than three years, will enable Hong Kong-domiciled fund managers to sell their investment vehicles to retail allocators in mainland China, while Chinese asset managers will be permitted to target investors in Hong Kong as of July 1, 2015. The initiative does impose a $48.33 billion quota on the amount of funds that can be sold into each jurisdiction.
Nonetheless, the scheme will remove the obligation for Hong Kong-domiciled managers to enter into an equity partnership with a Chinese firm or apply for a license in order to market, something which has historically impeded Hong Kong funds from accessing Chinese allocators. The China Securities Regulatory Commission (CSRC) said there were approximately 100 funds in Hong Kong and 850 funds in China that are eligible for the Mutual Recognition Scheme.
“There is a huge and burgeoning middle class in China, which needs to diversify and they are looking beyond Chinese fund managers and investments towards foreign fund managers. As such, I am sufficiently bullish that Mutual Recognition will be successful in the mid to long term. However, managers must be patient. It is likely to be the larger, brand-name firms with a long-standing presence in Asia-Pacific (APAC) that will be the first movers. At first, some managers are adopting a ‘wait and see’ approach towards Mutual Recognition,” said Florence Lee, head of China sales and business development for Europe, Middle East and Africa (EMEA) at HSBC Securities Services, speaking at Fund Forum International 2015 in Monte Carlo.
At present, funds transacting in equities and bonds and exchange traded funds (ETFs) will qualify for the initiative, but that is not to say esoteric products will be unable to take advantage going forward. “The fund asset classes that will be initially permitted under Mutual Recognition will be broadly vanilla. If the initiative is successful, it could be extended to funds trading derivatives or real assets at a more mature stage,” commented Lee.
While Hong Kong firms do not need to enter into an equity partnership with Chinese financial institutions, they will be required to appoint a local agent. Furthermore, it is essential that they enter into distribution arrangements with the large banking players and wealth managers in China. “To attain success in China requires Hong Kong managers to partner with banks and wealth managers to distribute their products. It is also advisable that managers liaise with online distribution platforms too as these entities have a sizeable traction and influence on the mainland,” continued Lee.
Some hypothesise China will extend Mutual Recognition to other jurisdictions just as it did with the Renminbi Qualified Foreign Institutional Investor (RQFII) initiative. Potential markets for Mutual Recognition could include Singapore, Taiwan, Luxembourg, Ireland and the UK, the latter of which is attaining dominance as a Renminbi centre. “RQFII, for example, was extended to other markets after three years and it is now operating in 13 markets. I believe Mutual Recognition will be extended to other markets once it is well established in Hong Kong. It will also give domestic Chinese managers an opportunity to solicit capital internationally,” said Lee.
In the short-term, regulatory approval by the CSRC is likely to be slow as the regulator proceeds with caution. Asset managers at Fund Forum International expressed restraint too. One multi-billion dollar asset manager, speaking on condition of anonymity, acknowledged that while there was scope for impressive growth in China over the long-term, they questioned the near to medium term ability to raise meaningful retail assets.
Mutual recognition is the latest in a series of liberalising measures to impact China’s capital markets. The Hong Kong-China Stock Connect initiative, which permits international investors with brokerage accounts in Hong Kong to trade China A Shares, and Chinese investors to trade in certain Hong Kong stocks, has gained momentum of late. Meanwhile, Shanghai has permitted a very small number of foreign hedge funds to raise capital from its institutional investors and high-net-worth individuals (HNWIs). However, the majority of these hedge funds have struggled to attract inflows.