Fund Forum: China mutual recognition could be extended beyond Hong Kong
The mutual recognition scheme between mainland China and Hong Kong could potentially be extended to Singapore, Taiwan, Luxembourg and even the UK, according to a report by HSBC.
The initiative, which experts predict will be launched later this year, will enable Hong Kong fund managers to market to mainland investors without having to partner with a Chinese firm or apply for a license, something which has historically frustrated asset managers in the region. For China, mutual recognition could lead to an internationalisation of the Renminbi and provide a boost to its domestic asset management industry by opening it up to international investors.
While Chinese officials have denied speculation that mutual recognition will be extended to other jurisdictions, some believe the initiative’s scope could be broadened in a manner not too dissimilar to how the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes were widened.
“Take RQFII as an example. The regime was firstly launched in Hong Kong. After the successful launch it was expanded to other countries including London, Singapore and France. There is a potential for mutual recognition to be extended to other jurisdictions,” said Patrick Wong, head of China, sales and business development at HSBC Securities Services for Asia-Pacific (APAC), speaking at Fund Forum in Monte Carlo.
Singapore, for example, has developed its RQFII offerings quickly while Taiwan has well-established cooperation agreements with China and a strong domestic funds industry, which makes it an equally attractive partner. Luxembourg, the domicile of choice for UCITS, would also be ideal although the HSBC report pointed out that China’s mutual recognition scheme could in fact be a ploy to limit the spread of UCITS into the mainland.
HSBC’s report described the UK as a dark horse candidate. While the UK has the technical expertise and is a growing Renminbi hub, its historical links with Hong Kong could work against it, continued the HSBC report.
Most industry participants predict China will adopt mutual recognition slowly. “China will phase in mutual recognition and it will only be open initially to those fund managers offering vanilla strategies such as equity and fixed income. It is essential that fund managers find a distributor, be it a local bank, to sell those funds to clients,” explained Wong.
The progress with mutual recognition has been rapid, something that cannot be said for other regional fund passporting schemes. The APEC scheme, also known as the Asia Region Funds Passport, which includes Australia, New Zealand, Singapore, South Korea, Thailand and the Philippines, has made little headway. The initiative, said the HSBC paper, is a potential UCITS substitute across those countries.
The ASEAN scheme, which is limited to Singapore, Malaysia and Thailand, is at a more advanced stage but challenges do remain. The HSBC paper said the ASEAN scheme would attract greater interest if it was broadened to include fast growing economies such as Indonesia, the Philippines and Vietnam.
Nonetheless, the HSBC paper points out UCITS took 25 years to develop while the ASEAN and APEC schemes could lead to “strategic uncertainty” to asset managers in the region over the short and medium term.
“At present, UCITS remains very popular in Asia-Pacific and the ASEAN and APEC schemes will be a slower burn. One of the biggest challenges remains regulatory in that all of the markets in ASEAN and APEC have different rules and regulations governing financial markets, and countries are at differing levels of economic development,” said Wade McDonald, head of sales and business development at HSBC Securities Services in London.