China application boom “pressuring” HK SFC
The rising tide of Chinese fund managers seeking licences to operate in Hong Kong is putting pressure on the resources of the city’s securities regulator, amid difficult times for the local investment industry, according to a compliance specialist.
The total of mainland private fund firms has soared to 30,000, estimates the Asset Management Association of China, though admittedly a significant number of these will be shell companies or not true asset managers, which mainland authorities are cracking down on.
Still, even if only 2% of them seek a type 9 (asset management) licence in Hong Kong, that will mean 600 applications for the Securities and Futures Commission (SFC) to process, said Josephine Chung director of CompliancePlus, a Hong Kong-based consultancy. Even this “very conservative estimate” of the number likely to apply is more than half the 1,135 licences in operation as of end-2015, she said.
As of March 31, 2015 only 21 mainland fund management firms had established licensed corporations in Hong Kong. The SFC declined to comment on how many applications were in the pipeline or the pressure this might be putting on its resources.
“We still see new [Chinese] clients onboarding for licensing – that trend is not stopping yet,” said Chung. “There’s a big wave of applications; more and more are coming in.” One current example is Shenzhen-based First Seafront Fund Management, which is awaiting approval, as reported.
Mainland firms won't necessarily have money to manage immediately, she noted, but they want the licence to give them an international base outside the mainland and allow them to focus on clients outside China.
“This is a case of risk diversification; they want to diversify portfolios elsewhere in Asia," added Chung. "It also is a way of improving the firm’s image and providing more regulatory and policy certainty.”
The number of Chinese private fund managers applying for licences in Hong Kong has “mushroomed” in the last year or two, confirmed Effie Vasilopoulos, co-head of the Asia investment fund practice at law firm Sidley Austin.
There are a variety of reasons for this, she noted. Some established managers wish to expand internationally, while others wish to satisfy demands from mainland clients who for access to dollar-denominated assets, given fears of a further devaluation in the renminbi.
In other cases, the driver is based on a perception that the legal and commercial regime for fund management in Hong Kong is more stable, transparent and flexible than in China.
“New restrictions imposed in China since last summer’s sharp market correction have catalysed all three of these commercial drivers,” said Vasilopoulos.
The increase in competition won’t be making things any easier for Hong Kong’s asset management industry, which Chung believes faces a difficult year.
Life will be tough, especially for the frontline sales guys and those without a China story to sell, she noted. “And even the China story is not so magical any more – everyone is selling the China dream now.
“This year will be very challenging for many fund houses in Hong Kong,” added Chung. “There will be a correction, with some firms laying off staff and potentially shutting down. Overall growth will continue, but some players will close down, and perhaps partner with other firms.”