Mutual recognition to put JV relationships to the test

Fund managers which have joint ventures in China could be among the biggest beneficiaries of the upcoming mutual recognition scheme, it has emerged.

But with the Sino-foreign partnerships likely to be first-movers when the cross-border link goes live in July, the quality of their relationships could be tested, analysts say.

Another group tipped to successfully exploit mutual recognition includes fund managers which have banking relationships in mainland China.

Shanghai-based consultancy Z-Ben Advisors says that foreign managers which can leverage their China relationships will potentially thrive under mutual recognition. Managers which have pre-existing mainland JVs and a strong Hong Kong-domiciled product line are seen as in pole position to succeed. Invesco Great Wall, CCB-Principal and China International Fund Management are among those JVs preparing to be early movers in the programme.

US fund house Invesco’s Hong Kong office will work with its Shenzhen-based JV Invesco Great Wall to appoint each other as their master agent when they distribute in each other’s markets.

Terry Pan, chief executive for Greater China, Singapore and Korea at Invesco, said the firm will focus on bringing in A-share equity and balanced strategies based on criteria including which products offer the best diversification for foreign investors.

Principal Asset Management (Asia) is also likely to appoint its mainland JV - CCB Principal Asset Management - as the master agent in distribution. The firm sees advantages in the JV’s established distribution network of banks, brokers and online platforms, particular its local shareholder China Construction Bank which owns more than 14,000 branches on the mainland.

China International Fund Management, a Shanghai-based JV between JP Morgan Asset Management and Shanghai International Trust & Investment Company, is set to be one of the first movers under the scheme. The firm is likely to appoint its Hong Kong subsidiary as its master agent and distribute its parent’s products through JP Morgan AM’s distribution network in Hong Kong.

Another group of winners will be those managers which have banking relationships in China. BOCHK Asset Management, the fund unit of Bank of China (HK), said it plans to participate in the scheme by introducing equity products. The firm is likely to appoint Shanghai-based Bank of China Investment Management, Bank of China’s fund management platform, as its mainland distribution agent.

“Hong Kong-based foreign managers need someone to be their master agents in launching funds - those with a pre-existing JV would look first to that company to do this,” said Stephen Baron, deputy director of strategic solutions at Z-Ben.

Baron said the JV relationship under mutual recognition could potentially bring in money. However, because China’s equity market is booming, Baron questioned whether mainland partners were more interested in selling their own products rather than putting Hong Kong funds on the market. The mutual recognition partnerships will test the quality of JV relationships, he said.

“As a foreign manager, you would be relying on the local partner to do a lot of work - would a foreign partner need to put some people into the JV to undertake some of the workload? Would they able to leverage any other existing platforms on the mainland such as their wholly foreign-owned enterprise [WFOE]?” asked Baron.

Not many managers have confirmed their potential master agents. But Baron said the appointment of a master agent on the mainland is critical for foreign managers, who have to make sure they work with the right people without compliance risk, and need to be comfortable with them representing the firm.

“No one wants to take huge risks [in brand name and in products] by entering a very rushed relationship because you want your products out,” said Baron.

The mutual recognition scheme was announced by both Hong Kong’s Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) last Friday (May 22), and will be officially launched on July 1, as reported.

According to the CSRC, approximately 100 Hong Kong funds and 850 mainland funds will be eligible for the scheme.