Cross-border RMB scheme: good or bad for HK?
One question on the lips of fund managers in Hong Kong and elsewhere is whether the proposed cross-border funds initiative with mainland China will enhance or damage the city’s ambition to become Asia’s key asset management hub.
Under plans disclosed in January by Alexa Lam, deputy CEO of the Securities and Futures Commission (SFC), authorised funds domiciled in Hong Kong and their mainland equivalents will be mutually recognised and sold directly in each other’s market for the first time.
While this scheme is not widely expected to be implemented within the next year, numerous fund houses are readying themselves for the opportunity, including Franklin Templeton, BlackRock and Amundi, as reported.
But others are pondering the potential impact on the city’s Ucits (undertakings for collective investment in transferable securities) products, which account for 70% of all authorised funds in Hong Kong. As at December, just 386 funds sold in Hong Kong were locally domiciled.
Alan Ewins, partner at Allen & Overy, has detected a hardening in the SFC’s attitude towards Ucits products. “SFC approval in the context of Ucits products has become more challenging, not least given the apparent suspicion over the use [or potential use] of derivatives in Ucits products,” he says.
Fall-out from the 2008 mini-bonds scandal heightened regulatory scrutiny in the city, including any potential backdoor ability to distribute complex products to retail investors under Ucits. This has stretched even to vanilla long-only Ucits funds in the past year, notes Ewins.
Some go further, accusing the Hong Kong regulator of outright favouritism. In a letter sent to the SFC and seen by The Financial Times, one company executive complained about slow approvals and the lack of transparency and communication channels for managers with fund applications to raise concerns, in contrast to the smooth process for renminbi-denominated qualified foreign institutional investor (RQFII) funds.
Ewins asks: “How does Hong Kong Inc want to be perceived? Does it want to be seen as a Greater China funds market or a broader gateway for Asian and European funds? We need to be careful to balance the inevitable pull of the Chinese market with the opportunities presented elsewhere internationally.”
Alwyn Li, partner at Deacons, says Hong Kong-domiciled funds were gaining momentum over Uctis rivals even before Lam’s announcement. “You only deal with the Hong Kong regulator, so the documents are tailor-made to that market, whereas with Ucits you go back to their home jurisdiction,” says Li.
Nevertheless, funds lawyers agree that Ucits is here to stay in Hong Kong. One of the scheme’s advantages is it recognises other Asian jurisdictions, including Singapore, Taiwan and, to a lesser extent, Malaysia and Korea. And that’s not counting the European Union market, which the framework was designed for.
“If fund managers build up locally domiciled funds in Hong Kong and gain access to China, that would only mean one more type of product is offered and one more market tackled,” says Taylor Hui, partner at Deacons. “Ucits and Hong Kong domiciled funds are not mutually exclusive.”
Moreover, HK-domiciled funds for the mainland market are unlikely to reach the level of sophistication of Ucits counterparts due to restrictions in the mainland. This leaves room for funds under the Ucits framework, which can include more complex structures such as derivatives.
Nicolas Papavoine, Hong Kong-based Luxembourg lawyer at Allen & Overy, notes that by using a Ucits vehicle, as opposed to a Hong Kong fund, Chinese managers would first be able to sell their products and build a track record in Hong Kong, before distributing them throughout the European Union.
“Alexa [Lam] was saying in her speech about Hong Kong becoming a major international centre for asset management,” says another lawyer. “You’ve actually got to walk the walk as well.”