Mutual fund recognition between Hong Kong and China has caught the imagination of asset managers looking to expand in the region. The participants in our roundtable in Hong Kong discuss the opportunities and challenges of this proposed scheme, and explore the potential to grow in and beyond China. Edited by Stefanie Eschenbacher.
King Lun Au, chief executive officer, BOCHK Asset Management
Vincent Camerlynck, chief executive officer, Asia Pacific, BNP Paribas Investment Partners
Karine Hirn, founder and head of Asia, East Capital
Richard Mountford, chief executive officer, Asia Pacific, Schroders
Xiaofeng Zhong, chief xecutive officer, North Asia, Amundi Hong Kong
Funds Global Asia: What opportunities would the much-anticipated mutual fund recognition agreement between Hong Kong and China present? What challenges are there?
King Lun Au, BOCHK Asset Managment: Mutual fund recognition is a means for China to gradually open up its capital account. Controls are still in place to administer on how domestic savings are invested in overseas markets. Hong Kong, being a special administrative region, is therefore the ideal candidate for a mutual fund recognition scheme. Eventually, though, China will have to relax some of this control as the capital account becomes more liberalised over time.
Karine Hirn, East Capital: One of the reasons why the asset management industry in China is so immature is because investors lack confidence in the regulator. If the Securities and Futures Commission in Hong Kong gave their stamp of approval, that would change a lot in the eyes of investors. We are active in Russia and face similar problems there, where the local asset management business is still immature.
Xiaofeng Zhong, Amundi Hong Kong: There is still a quota system in place to regulate capital flows and it is unlikely that asset managers will be able to simply sell any of their funds into China. They will still have to seek approvals from the Chinese regulators. In that sense, mutual recognition is not yet a passporting as it is the case in Europe.
Vincent Camerlynck, BNP Paribas Investment Partners: There are still uncertainties when it comes to regulation. When we look at Europe, it took 25 years to bring the Ucits brand to where it is. Hopefully, it will be quicker to achieve a regional platform.
Richard Mountford, Schroders: There clearly has to be some sort of knowledge exchange between the regulators.
Au: Mutual fund recognition is a result of discussions between asset managers and the regulators, but also the government. The rationale behind this strategic initiative has got something to do with capital account opening. To successfully promote the increasing use of renminbi globally, there must be a two-way flow of renminbi funds between China and the rest of the world. To generate this two-way traffic, China will have to liberalise its capital account. Opening up the investment fund channels is a significant step in the liberalisation process, and making Hong Kong the gateway to China is a logical development.
Zhong: The mutual fund recognition scheme should also translate into lower cost for investors because it would enable asset managers to pool resources and to better connect various geographical units so as to realise synergies. Mutual fund recognition gives us the opportunity to harmonise some of the rules, which should make it easier for asset managers.
Au: It will be interesting to see how joint ventures will develop and whether other forms of corporate partnerships will emerge.
Camerlynck: There is also a strong likelihood that the qualified domestic institutional investor (QDII) and the qualified foreign institutional investor (QFII) programmes will be expanded further.
Mountford: The onshore mutual fund industry in China has been declining for some years and has been correlated with the local market. There is growth in the wealth management area because wealth managers have the ability to arbitrage deposits in the absolute return space.
Funds Global Asia: Which types of funds are suitable for distribution in China under the mutual fund recognition scheme?
Hirn: China has long kept foreign players out of certain industries, but they know that these industries do not become competitive when they are kept domestic. At the same time, regulators are concerned about protecting investors and it is likely they will initially only allow plain vanilla products from foreign asset managers
Camerlynck: Just because asset managers are keen to sell their funds into China, it does not necessarily mean there is enough demand for them.
Au: Hong Kong regulators will be able to discuss with the Chinese regulators on what asset class, markets and type of funds to be included in the mutual fund recognition initiative. It will be a
Funds Global Asia: How can asset managers distribute funds in China, a country where distribution is dominated by the large, state-owned banks? How might an asset manager build its marketing strategy?
Zhong: Right now, it is all about banks. However, things evolve quickly and China may well decide to significantly relax rules on fund distribution, allowing more foreign banks to distribute funds, for instance.
Mountford: International banks are already present in China, which offers one open channel for distribution; asset managers that have relationships with the large, state-owned banks might have an advantage should there be a move towards an open architecture model.
Zhong: Banks in China cannot provide custody services to the funds manufactured by their asset-management arms, meaning that they are de facto incentivised to sell funds from asset managers so they can get custody business.
Hirn: When it comes to selling funds into China, distribution is bank-based and there is a lot of pressure to pay up-front commission payments.
Mountford: Initially, mutual fund distribution will be costly for asset managers. It is also not clear if they will be able to pitch to the emerging domestic pension funds, which is, no doubt, one of the more attractive future prospects.
Au: Brand-building is important because Chinese investors are brand-aware. This will be a challenge for foreign asset managers going into China.
Hirn: E-commerce could enable asset managers to sell large volumes of funds because it could help them overcome the barriers of having to have a large branch network. The urban middle class is huge and they are engaged online. They could start shopping funds online. Alibaba and Baidu are already in this business.
Camerlynck: There are some examples in Germany where e-commerce has taken hold. Although there are a lot of issues to address still, it is a channel that could lead to a whole different distribution structure.
Funds Global Asia: One aspect of mutual fund recognition between Hong Kong and China envisages that the fund is domiciled in Hong Kong. Are you considering launching funds in Hong Kong to qualify for this scheme and build up a track record?
Zhong: Taking into account the regulatory fragmentation in the Greater China or North Asia region, we will have to consider local products as well. In order to be efficient in exporting funds manufactured here to a wider geographical area, a European passport would make a lot of sense. Ucits is still the prevailing norm.We are still waiting to get more details as to what the Chinese regulators would like to see in asset managers and what the conditions for distributing funds are. The mutual fund recognition project has so far been driven by Hong Kong, which has ambitons to become an international financial hub and the place to go to in Asia.
Hirn: Although Hong Kong is a large asset management market in Asia, there are not many global players with local capabilities when it comes to investment management. Their activities here are dominated by marketing and sales, not so much the production of funds.
Au: It all depends on how the scheme develops, but we have seen new players coming to Hong Kong in recent months. Mutual fund recognition will create opportunities on both sides of the border. International asset managers will be able to market their global capabilities into China while domestic asset managers will have to be more competitive.
Funds Global Asia: In Hong Kong, it takes up to eight months to register a Ucits fund with the local regulator for sale to local investors, whereas five years ago it took a few weeks. Taiwan is also making it increasingly difficult for foreign asset managers to distribute their funds there. What signals does this send out?
Mountford: Hong Kong is not uncommercial when it comes to the speed of fund approvals. Just like elsewhere in the world, products are becoming more sophisticated and complex.
It is harder to understand them and after the financial crisis regulators have become more cautious.
Camerlynck: In Taiwan, regulators aim to create a balance between onshore and offshore funds. We have a joint venture in Taiwan and know from experience that it is equally difficult to register onshore and offshore funds. Longer approval times are the result of the regulator trying to understand the products and ensure investor protection, perhaps also avoiding duplications.
Hirn: Even Ucits is not a product that is ready; it is constantly changing. There was one directive for 20 years and then we had three directives in five years.
Funds Global Asia: The emergence of Hong Kong subsidiaries of Chinese asset managers has shaped the industry like no other development in recent years, with a handful of players taking in large amounts of assets. How do you see Hong Kong evolving?
Zhong: Hong Kong-based subsidiaries of Chinese asset managers were the first to be granted a renminbi qualified foreign institutional investor (RQFII) quota. This approach of doing something on a gradual, controlled basis in the form of a pilot scheme is deeply embedded in the Chinese culture.
Mountford: Beyond currency convertibility and quotas, Chinese asset managers face the same challenges as their international peers.
Hirn: It takes decades to build a global business, but of course there is always the option of acquiring one. This could happen in China where asset managers have cash, but not a decade. A truly global player cannot only invest in China, even if there are compelling opportunities, and cross-border mergers and acquisitions could be a way for Chinese asset managers to become global.
Au: The challenge is to market our products overseas. We have adopted a partnership approach instead of setting up our own Ucits platform. We are still new to retail investors in Europe, which, just like the ones in Asia, may prefer to stick with the well-known, established brands. Some of our peers have set up Ucits funds and platforms, launching a range of products in Europe, but have struggled to get critical mass.
Funds Global Asia: The demographic transition towards an older population is turning income support into a challenge throughout Asia, where public pension systems are often inadequate. Are you planning to tap into this market?
Mountford: Demographics in Asia are varied. India and Indonesia look fine, as do Thailand and the Philippines. In China, Hong Kong and Singapore, the situation becomes more pressing. Korea is another example. Taiwan is perhaps the most difficult one because not all the structures are in place. It has taken Japan some 17 years to improve the defined contributions system and allow tax breaks.
Camerlynck: Despite the challenges, the pensions market in Asia is one of the key draws for international asset managers. Assets in the pension space are growing and investors are likely to diversify beyond their domestic markets. The specific needs of the pension industry will require asset managers to create products adapted to each market.
Au: As a start-up, we now concentrate mainly on China and Asia, especially renminbi bonds and China equities, while tapping into the pension markets indirectly through our distribution partnerships in Asia. We aim to expand our product capability in the long run.
Hirn: In Europe, we manage some retail money that happens to be in the form of long-term investments. Getting institutional money is hard, and the sales cycle long, but it is sticky money. We are a boutique and we only focus on emerging markets. All emerging markets are different, but their common trait is that they lack a stable domestic asset management industry. They depend on international flows, and that creates vulnerability. For any country in the world to realise its external vulnerability becomes dangerous in some situations and often they respond by propping up their domestic industry.
Mountford: In Asia, there are not the same sort of social safety nets there are in Europe. However, the asset management industry evolves, it will become different from that elsewhere in the world. It will be an interesting challenge. Asia has been more of a retail market in the past, but that is changing.
Camerlynck: European asset managers have some advantages because they are able to build upon some of the trends they have seen in their home markets, whether it is for absolute return, balanced funds or other diversified funds. They have also decades of experience in dealing with clients and tailoring their product offerings to meet specific needs.
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