HK-China ‘on brink’ of mutual recognition

The launch of HK-China mutual fund recognition is near and will secure Hong Kong’s position as the world’s premier offshore RMB hub, Alexa Lam of the city’s securities regulator told a forum.

But for Hong Kong’s asset management industry to flourish, it needs to augment traditional strength in fund distribution with investment portfolio management and professional services provision, she stressed.

Lam (pictured), deputy CEO of the Securities and Futures Commission (SFC), was addressing 380 delegates at the 7^th annual conference of the Hong Kong Investment Funds Association (HKIFA) yesterday.

She set out to tackle the question of how the renminbi’s rise affects the global financial industry and Hong Kong’s place within it.

Lam underlined that Hong Kong was ahead of the game and should be thankful for favourable mainland policies, such as the introduction and expansion of the renminbi-qualified foreign institutional investor (RQFII) scheme.

She highlighted the importance of Hong Kong maintaining an open market, which had helped its asset management industry to gain critical mass over the past 30 years.

Now was the time, she argued, to build on the city’s core strengths and “meld the vital mainland factor into our growth engine”.

She identified fund distribution sales as the city’s traditional strength, accounting for three quarters of the industry’s workforce.

But she said there was a need to add new dimensions, which she outlined as investment portfolio management – “the intellectual part” – and fund administration such as domicile, custodian and administration services.

“What I am talking about is a vision and a roadmap to create a seamless end-to-end asset management platform,” she told the forum. “Right now we have the middle part of it, the sales, but we want to go for the front part and the tail-end.”

She highlighted two factors that would make this possible, firstly the opening of the mainland capital market to international investors, with Hong Kong serving as the traditional gateway.

“Over the past few years we have noticed that more funds have chosen to be domiciled in Hong Kong,” Lam said. “This goes to the first part of my proposition, the intellectual part of asset management. That is one of the key strengths we need to build.”

The second factor was the export of capital by the mainland as its citizens increasingly seek investment and risk diversification.

At this point she introduced mutual recognition, saying it would give fund managers greater incentive to set up in Hong Kong.

“There are close to 2,000 funds authorised by the China Securities and Regulatory Commission (CSRC), many of which would be able to access the mutual platform and come to Hong Kong,” she said.

“Therefore overnight we will have a deep pool of RMB products. In the competition to be the premier RMB centre, the market which can provide the broadest and deepest pool of offshore RMB assets and investment products will win.”

She noted that the SFC was working with the government to improve infrastructure, including an open company investment structure as another vehicle for fund managers to package products.

And referring to the Third Plenum and the prospect of Beijing pushing through market reforms with renewed force, she added, “We will have more opportunities emerging from the mainland, and it is for us to go and capture them.”

Keeping the audience on tenterhooks for an indication on the timeframe of mutual recognition, Lam stressed that the initiative was of such significance for both markets that it could not be rushed.

She talked about the need to take “a measured, pragmatic and possibly conservative approach to facilitate a successful rollout”, saying the scheme would start with plain vanilla products.

“Once we get going and we are comfortable with how the market has developed and that the two regulators are working in a seamless manner, we could consider allowing greater diversity and a wider scope, but that will be stage two.”

She noted that was the path the regulator had taken with RQFII, which she suggested had proven to be the correct one.

Saving the best till last, she added: “We are now putting together final details. Once we are done, we will have an announcement for you.

“You can probably figure out from the way we have talked and the ability we have to share such information with you that we are literally in the final stretch of the journey.” Exit stage right.

The previous speaker, Xu Hao, deputy director-general in the CSRC’s fund supervision department, had been similarly suggestive on the timing of mutual recognition.

He spoke of China’s rapid opening up over the past two years, with increased cooperation between Hong Kong and the mainland a key feature.

He provided a potted history of QFII and RQFII and offered assurances over Hong Kong’s position based on its close business and trading ties with the mainland, which he said was not comparable with other places.

But he acknowledged that mutual recognition amounted to a higher level of opening up and would inject new momentum.

He referred to mainland fund managers he had just met in Shenzhen feeling nervous over the prospect of increased competition, but stressed that the scheme would create new business opportunities for fund houses on both sides.

And on the question of timeframe, he said a working mechanism had been finalised and consensus reached, with a tripartite group doing studies to iron out the details, including timing. “We want it to start as soon as possible,” he added.