Bank of China (Hong Kong) is building a custody unit based on its success at winning mandates from Chinese managers who invest overseas. Nick Fitzpatrick
talks to its leader, Fanny Wong, about its future.
Bank of China
is one of China’s largest banks and its custody division has won more mandates than any other bank from Chinese fund management companies that are licensed to invest overseas. It now expects to gain a similar presence in the next potentially great opportunity in Chinese asset management: funds of mainland China’s domestic currency - the renminbi – deposited in Hong Kong.
But how is this bank, which is comparatively brand new to the institutional custody market, positioned to keep up with Chinese developments in investment management and compete against giant foreign custodians with broader experience of cross-border investment?
The answer to that depends very heavily on Fanny Wong, head of custody for Bank of China (Hong Kong) – or BoCHK – which is a Hong Kong-listed division of the Beijing-based Bank of China. She has been with Bank of China for four years, which is the same length of time that the bank has been in the institutional custody market.
“The Bank of China group had carried out safekeeping for its retail customers for many years in Hong Kong, so senior management decided in 2006 that the bank was well positioned to tap into the QDII market,” she says. QDII is the Qualified Foreign Institutional Investor scheme that licences some investment managers registered in China to invest in overseas markets according to quotas.
Subsequently, in early 2007 Bank of China formally launched its institutional custody business and, according to Wong, the bank now has the largest number of QDII custody mandates in it peer group.
This success may look surprising for a bank with virtually no history in institutional custody, but there is more background to it than merely a board decision to enter the business.
Wong was recruited from Citi, where she was Hong Kong country head for custody and fund services. The BoCHK core custody team of 15 had mainly all worked for foreign custodians or brokers for many years. In the region many familiar names can be found, such as JP Morgan and HSBC, as well as smaller players such as Brown Brothers Harriman and Northern Trust.
The recruitment of these 15 custody staff falls in line with the Chinese government’s strategy to develop its financial services industry by gaining valuable experience from personnel that have worked in more developed markets, or through joint ventures with foreign firms.
The expertise brought to Bank of China Group in Hong Kong by the team is bolstered by the bank’s own joint venture with Prudential, the UK financial services company. Together they own a trustee company – BOCI-Prudential Trustee - that provides the bank’s custody operation with important value-added services, such as fund administration, investment accounting, compliance monitoring, transfer agency and distribution support that are bundled into the custody offering.
“Here in Hong Kong we are about one-stop-shop product offerings. We service institutions and corporate clients for their international investments,” says Wong. She explains that QDII regulations in China call for two-tier custody arrangements for all QDII mandates, so Bank of China (China) – the parent - covers the domestic China market and BOCHK acts like a foreign sub-custodian for it.
“We understand the international practices, while the parent company understands the local practices and regulatory requirements,” she says.
Wong expects that the bank will pick up more QDII business as Chinese insurance companies penetrate deeper into the international market, alongside the banks, fund managers, brokers and trustee companies that are already well established in QDII.
However, there is fierce competition out there. Only recently The Bank of New York Mellon consolidated its lead as the global custodian with the largest amount of QDII assets under administration when it won a global custody mandate from the asset manager Bank of China Investment Management, a joint venture between BlackRock and the Bank of China. China Construction Bank awarded the mandate and the fund is named the BOC Global Strategic Fund.
BoCHK is largely focussed on Chinese fund managers that want to point their businesses internationally. The bank itself has businesses in Luxembourg and Switzerland.
It also services private funds from the Cayman Islands and the British Virgin Islands. But of increasing importance are fund managers – Chinese and foreign – who will pick up assets as the renminbi is internationalised. Currently, the investment management industry in China is looking at the so-called “mini-QFII” regulations which allow Hong Kong subsidiaries of China fund management firms to target Hong Kong’s pool of renminbi’s held offshore, and to invest them in mainland capital markets.
“We have a medium to long-term ambition to service fund managers as they ride on the internationalisation of the renminbi. Even outside of Hong Kong some fund houses want to launch renminbi funds and our role would be to help them in product packaging from the operations perspectives, given the fact that renminbi is not yet freely convertible.”
BoCHK is the only renminbi clearing bank in Hong Kong and it holds the largest deposit base of the currency outside of mainland China. At the end of 2010 the total deposit base in the Hong Kong market amounted to RMB319bn (€34.85bn) and BoCHK accounted for more than one-third of the total, she says.
Last August Hai Tong Asset Management awarded BoCHK with custody and related services for its Haitong Global RMB Fixed Income Fund, the first public remninbi fund offered in Hong Kong.
The fund is permitted to invest in remninbi-denominated securities listed globally, but the so-called mini-QFII scheme will see China’s fund management firms become authorised to access offshore remninbi deposits to invest back into securities listed on the mainland. This gives China’s domestic managers an ability to compete with foreign managers authorised under the broader QFII (Qualified Foreign Institutional Investor) scheme to raise funds from abroad to invest in China. It is in this development that Wong sees opportunities.
“We’ve heard that the fast-track is about to materialise and we are aware of some ten managers already queueing,” she says.
She expects BoCHK will have a competitive edge, given the intricate knowledge of China’s securities markets by the mainland parent bank.
However, foreign players have years of investment in technology behind them. Technology is important to custodians as they push for greater automation of their fund management clients across the world, not just in China or Asia. Wong acknowledges the challenge of automation in the Chinese fund management industry.
“There are quite a number of manual processes in Chinese investment management, and fund managers also require a lot of customisation,” she says. BoCHK is investing in more IT enhancements, although the bank’s custody operation is already connected to the Swift network. Swift is the primary international operations processing standard for global custody services, enabling greater levels of straight-through processing.
As well as competition from European and North American custody banks, though, competition will also come from other Chinese banks. These could include the Industrial and Commercial Bank of China (ICBC).
But despite this, as China’s fund managers increasingly internationalise, Wong believes BoCHK will be an important bridge for many of them with the rest of the world.
“We want to be the bridge between China and the rest of the world, and people will get a lot of hand holding from us, and that’s how we can add extra value as our clients venture into new waters."
©2011 funds global