What CPPIB would like to see from Hong Kong

Hong Kong is of growing importance to global asset owners as a commercial and investment hub, yet more can be done to increase its appeal, a forum heard.

The view was expressed by Mark Machin, senior vice-president and international head at the Canada Pension Plan Investment Board (CPPIB), which has $31 billion committed to the region.

He was speaking on a panel entitled 'Hong Kong: Asia’s Premier Asset Management hub' at the Asian Financial Forum earlier this week. AsianInvestor reported opinions on the HK-China mutual recognition scheme from the event on January 14.

CPPIB selected Hong Kong to base its first overseas office outside Canada. It now has a team of around 50 staff there to deploy assets across public and private markets.

Asked by moderator Peter Pang, deputy CEO of the Hong Kong Monetary Authority, what had attracted CPPIB to the city, Machin replied “strong rule of law and regulation, access to China, geographic location and ability to find talent”.

Stressing that CPPIB had a very long-term horizon, viewing 25 years as its equivalent of a quarter, he added: “When you look at demographics and economic growth, this part of the world will continue to be more important versus Europe, so that is why we decided early on that this would be our first international office.”

He noted that China was on its way to becoming the world’s largest economy, Japan would remain a major economic force, India in the very long term would be among the world’s top three economies and Australia would remain vibrant.

“The way we look at it, we need to get those four major economies right and Hong Kong is the central geographic place to do that from,” he added. “We have found Hong Kong a good place to build a team.”

Asked what kind of products and services might attract more asset allocation to the region, he stressed the big thing would be the ability to get more money into China’s domestic markets.

CPPIB has received a total of $600 million in QFII quota, although as Machin noted: “Most asset managers in the world are significantly underweight China relative to the size of the economy [as opposed to its capital markets].”

On areas Hong Kong could improve in, he pointed to more developed credit and commodity markets. “That is something that has been a constant fight against Singapore and is something that needs to continue to be worked on,” he added.

He also stressed that Hong Kong needed to be mindful not to lose its innovation and information edge relative to China. “Extraordinary innovation is going on in Beijing, but also Shenzhen and elsewhere [in mainland China], that is going to change the financial and technology world,” Machin said.

“I think Hong Kong needs to fight hard to bring some of that DNA back into Hong Kong, using the university system and other mechanisms to keep its edge and make sure the gap doesn’t grow versus China.”

He made reference to the issues of pollution and schooling, warning that his former firm had lost people to Singapore due to these factors. Pang, the moderator, sought to assure him that Hong Kong was “doing a lot to reduce pollution levels and provide more schooling”.

Specifically on Hong Kong’s asset management industry, Pang noted its AUM had increased fourfold over the past decade to $1.6 billion, adding that 80 of the top 100 fund houses internationally had a base of operations in the city.

Pang pointed to two issues that Hong Kong needed to stay on top of to prosper: soft infrastructure and an efficient legal and tax regulatory framework.

Asked what the key policy areas were the government is working on to reinforce the city’s position as an international finance centre, Selina Yan, deputy secretary for financial services and the treasury, pointed to several initiatives, including amendments to the law on Islamic finance and reorganising the city’s trust laws.

On the asset management industry, she added: “We are looking to provide a more flexible legal vehicle for asset managers to have a home in Hong Kong.

“We are also looking at providing the legal framework for funds to be set up in corporate form. And we are looking at introducing legislation to allow open-ended fund and investment companies to be set up in Hong Kong.”

Alexa Lam, deputy chief executive of the SFC, added more numbers into the mix. She noted that Hong Kong had seen a 62% increase in licences granted to asset managers last year, 30% of which had a mainland Chinese background.

Further, the city has seen a 160% increase in the number of Hong Kong domiciled funds over the past five years. Of HK-domiciled funds approved last year, 54% were renminbi-denominated.

She also pointed to rapid growth in number and variety of RQFII products, from equity and dim-sum funds, ETFs, gold products, Reits and unlisted structured products.

“In short, I think Hong Kong is well positioned to be able to continue to help grow the wealth that has been created in Asia,” Lam concluded.