HK-China mutual recognition forecast to flop

The Hong Kong-China mutual fund recognition scheme will give rise to intense disappointment when it is launched, while the next jurisdiction to join it might not be Asian, believes Shiv Taneja of Cerulli Associates.

Speaking to AsianInvestor ahead the Alfi global distribution conference in Luxembourg late last week, Cerulli’s London-based managing director points out that China’s cross-border funds market is less than 2.5% of its domestic market.

He notes that unless managers believe the 2.5% figure will increase exponentially every year, “the size of the mutual recognition platform is going to be a small one to begin with, and a relatively small one for the foreseeable future.

“I think there will be an intense period of disappointment before there is any true sense of what it can potentially yield over time.”

Further, Europe’s proposed Financial Transaction Tax (FTT) was selected as the single biggest threat to the future of Ucits by a leading 47% of asset managers in a recent global survey carried out by Cerulli and Citi.

According to FTT proposals, fund houses buying or selling European securities or dealing with a European broker will eventually face unspecified fees from countries implementing the rules.

China’s planned mutual recognition platform with Hong Kong was only selected by 15%, indicating the hype of the scheme is outpacing its likely impact, at least initially.

While Taneja sees Hong Kong as the natural starting point for mutual recognition, he goes against the grain by suggesting that the next jurisdiction to join the scheme will not be Taiwan and not even Asian, but a multi-national jurisdiction such as Luxembourg or Dublin.

“That is speculation on my part, but something says to me that the next one will be outside of Asia,” he says.

Arguing against the point that Hong Kong and China are intent on developing their own domestic funds marketplaces, and as such will prioritise locally domiciled product, Taneja notes that it will be largely multi-national firms in Hong Kong that participate.

“If I truly wanted to present [new fund structures] to my retail investors, I would go to the jurisdictions with 28 years of experience in running cross-border strategies,” he says. “Something says China is not going to sit back and put all its eggs in the Hong Kong basket.”

Taneja points out that successes seen in Asia have not necessarily come from domestic fund houses, but multi-nationals. Yet despite these strides, he argues that Asia has been, and will remain for the foreseeable future, a largely onshore and domestic marketplace.

For Asia ex-Japan, the share of cross-border fund sales has not risen above 12.5%, against 45% for Europe. While cross-border assets have more than doubled since 2008 to stand at $116 billion in Asia, in percentage terms it is fairly static.

“If you want to be a pure-play cross-border manager and have no interest in the domestic market, then you are restricting your opportunity to 12.5% of the industry,” he says.

That points to why the larger fund houses have sought to establish, or have established, onshore structures in Asian markets already. But Taneja’s point is that the reality of the cross-border mutual recognition scheme may fail to live up to the hype.