Managers should still enter strategic partnerships in China despite mutual recognition scheme
Asset managers looking to take advantage of the mutual recognition scheme between China and Hong Kong should continue to enter strategic partnerships with mainland firms despite not being obligated to if they want to reap the distribution benefits.
The mutual recognition scheme, which is due to be approved any day now, 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 a non-PRC (People’s Republic of China) fund manager is not required to have a partnership with a PRC domestic entity to take advantage of this scheme, they may struggle to market their funds to PRC domestic investors directly due to the cultural idiosyncrasies, vast size and nature of the PRC domestic market. It would, therefore, be prudent to enter into a joint venture or arrangement with a domestic PRC placement agent or distributor in the mainland,” said Choo Lye Tan, partner at K&L Gates in Hong Kong.
While the Hong Kong-China mutual fund recognition program has been pending for over 18 months, no firm date has yet been set for it to come into effect although both the Chinese and Hong Kong regulatory authorities are reportedly keen to launch the initiative.
There is speculation China could extend mutual recognition beyond Hong Kong in a manner not too dissimilar to how the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes were extended. A recent report by HSBC said Singapore, Taiwan, Luxembourg and even the UK were all potential candidates for an enhanced mutual recognition scheme although this has been denied by the Chinese authorities.
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. “It is possible that mutual recognition could be a means by which to stymie UCITS making inroads in China,” said Tan.
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.
China is also opening up its doors to hedge funds. The Qualified Domestic Limited Partner (QDLP) Programme permits a limited number of foreign hedge funds to tap the wealthy private investor community in Shanghai for capital. However, this is subject to onerous restrictions.
Only six hedge funds – Canyon Partners, Citadel, Man Group, Oaktree, Winton Capital and Och Ziff – have received approval from the Shanghai regulator to raise capital on the mainland. Furthermore, the regulator has limited all of these hedge funds to an overall quota of $300 million to manage, which will be split six ways. Reports suggest only Citadel and Canyon Partners have raised decent sums of capital so far. Hedge funds have found there to be distribution challenges in China as their domestic asset manager, securities companies or banking partners have little commercial incentive to work with alternatives managers as the capital hedge funds are allowed to raise is so limited.
Nonetheless, the Shanghai regulator is said to be in talks with other hedge funds hoping to take advantage of QDLP. Experts predict the first movers into China will reap huge rewards although there is always a risk Beijing could scrap the experiment arbitrarily.
Chinese investors are not averse to putting money to work in hedge funds. Its sovereign wealth funds are known to dabble in hedge funds although many other allocators, such as insurers, are generally cut off or prohibited from investing in the asset class. Hedge funds are not included in the list of Qualified Domestic Institutional Investor (QDII) list of approved investments, although a study by Barclays Prime Services in May 2014 indicated the rules could be changed as China continues to liberalise its capital markets.