Confidence wanes on cross-border schemes

Programmes including mutual recognition, Asean CIS, QFII, RQFII and Stock Connect appear to have fallen in favour, while ARFP, QDII, QDLP and QDIE have gained popularity.
Confidence wanes on cross-border schemes

Confidence in some of Asia’s fund passport and cross-border trading schemes has weakened, while others have risen in popularity, according to AsianInvestor and Clifford Chance’s 2016 annual asset management survey*.

For one thing, the long-awaited China-Hong Kong mutual recognition of funds (MRF) scheme has not been as successful as was hoped, while the Asean Collective Investment Scheme has proved limited despite its first-mover advantage. MRF remains the scheme most widely expected to provide the best platform for business growth (see first graph, below left).

On the brighter side, the Asia Region Funds Passport (ARFP) saw a healthy rise in votes – 36.2%, up 24% on 2015 – from respondents asked which Asian passport scheme would provide the best platform for growth.

The scheme so far includes Australia, New Zealand, South Korea and most recently Thailand, the four countries to have signed the memorandum of cooperation. Japan and the Philippines have also signalled their commitment to join the passport, which came into effect on June 30.

Singapore had originally indicated its intention to join, but has since pulled back as a result of concerns over tax treatment across jurisdictions.

Interestingly, Vietnam and Indonesia both attracted interest from investors asked which markets they would want to access that were not in a passport regime (see pie chart, right). India topped that wish list, followed by Japan.

In terms of the ideal location for domiciling funds, traditional locations such as the Cayman Islands, Ireland, and Luxembourg remain popular.

“The classic fund domiciles are still the most popular – but this may change with additional regional options ­– such as open-ended fund companies in Hong Kong and Singapore – coming into play, and regulatory and tax regimes forcing more funds onshore,” said Mark Shipman, partner at Clifford Chance.

RMB access

The problem of repatriating capital out of China appears to have grown more important the asset management industry, as the country tackles slower growth and attempts to manage a more flexible currency. This was reflected in the responses to the question of how investors were gaining exposure to the renminbi (see graph below, left).

Using offshore renminbi was the most popular method, closely followed by China access products. However, confidence dipped when it came to the Shanghai-Hong Kong Stock Connect trading link, the qualified foreign institutional investor (QFII) programme, and its renminbi equivalent (RQFII).

Perhaps less surprisingly, Stock Connect’s appeal as an access channel into China has waned dramatically fashion over the past year, from 54% to 37.5%. Mainland stock volatility since June last year and delays to the Shenzhen-Hong Kong Stock Connect will have dampened appetite. But it may be too early to call the strategy a failure.

Interestingly, despite the qualified domestic institutional investor (QDII) scheme having been effectively suspended to prevent flows of capital leaving China, respondents seemed more confident that it would prove a useful access channel in the next 12 months (see graph, below right).

Interest in the Shanghai’s qualified domestic limited partnership (QDLP) and Shenzhen’s qualified domestic investment enterprise schemes (QDIE) also jumped.

“Despite current restrictions on outbound programmes [in China], the direction of travel is clearly towards liberalisation of capital controls,” said Ying White, partner at Clifford Chance.

*The survey received 225 responses from executives at asset owners, distributors and asset management firms. It was carried out over four weeks in April 2016. The full write-up, with all graphs, appears in the July/August issue of AsianInvestor magazine. Two previous article extracts from the feature appeared in the past 10 days on, one focusing on the increasing popularity of ETFs for gaining Asia exposure and the other on which client types are expected to provided the best fundraising opportunities.

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