HK execs dismiss London-China recognition deal
Fund industry experts have rubbished rumours that Beijing and London have struck a deal to set up a mutual fund recognition programme within months to rival Hong Kong’s own pending deal.
Quoting a China banker close to the China Securities Regulatory Commission (CSRC), a Financial Times article recently claimed the UK would receive a reciprocal funds arrangement as early as June this year similar to the one mooted for Hong Kong.
Details on the HK-China scheme are widely expected to be announced within weeks, with agreement having already been reached on the scope of the project, eligibility requirements, disclosure and investor protection.
The speculation about London came after the announcement that Rmb80 billion in renminbi qualified foreign institutional investor (RQFII) quota would be made available to UK institutions to allow investors direct access into onshore China securities.
Only this week, Lieven Debruyne, CEO and head of Hong Kong intermediary business at Schroder Investment Management, called on authorities to offer fund houses in Hong Kong assurances over the mutual recognition scheme, as reported.
He told the Asian Financial Forum that if mutual recognition became applicable to other countries after six months, then international firms would have to decide if there was any advantage to using a Hong Kong platform as against an established larger platform such as Ucits.
“Some clarity around how unique Hong Kong’s position in this would be important,” Debruyne said. “From that perspective clearly the sooner we get going [with the scheme’s launch] the better.”
But scepticism is rife in Hong Kong’s asset management that the CSRC has struck any such deal with London.
Stewart Aldcroft, Hong Kong-based CEO of CitiTrust and an active participant in debates on mutual recognition, states confidently that the recognition scheme will be “between Hong Kong and China [and] will not involve anywhere else anytime soon”.
He points to challenging hurdles that would take time to master before such a scheme could be introduced between the UK and China, not the least of which would be coordinating vastly different regulatory regimes unused to working closely together.
While speculation is rife that the HK-China mutual recognition scheme will be announced imminently, this has been several years in the making. Alexa Lam, deputy chief of Hong Kong’s Securities and Futures Commission (SFC), first spoke publically on this a year ago, and even then preparations were well underway behind the scenes.
Nicolas Papavoine, Hong Kong-based funds lawyer at Allen and Overy, notes that authorities in Beijing and London would be required to form new rules essentially from scratch, extinguishing any hope of them completing a deal by mid-year. Further, there is far less political synergy and more distrust between the UK and China, as opposed to Hong Kong's one country, two systems policy.
“The Chinese authorities always seem to test [pilot programmes] first with Hong Kong,” says Papavoine. And despite the close ties with Hong Kong, setting up mutual recognition has already proved anything but smooth sailing, he adds.
“There are a number of practical problems as discussions have continued between Hong Kong and China, issues that we didn’t even foresee,” he notes, including whether foreign representative offices would be allowed to provide sales support to distributors in China. "This is even considering that those two systems [HK-China] have been used to working together for years.”
Papavoine also notes that the Hong Kong government would lobby hard against such a partnership, given the city’s ambitions to develop as a premier asset management centre and the world’s leading offshore renminbi hub.
“If those mutual recognition agreements were rolled out to other jurisdictions too soon it would have a detrimental effect on Hong Kong as a fund management centre,” Papavoine adds, which is something Beijing would be unlikely to want.
“Fund managers need to develop a lot of substance here in Hong Kong [basing staff and funds in the city], and if they know that in six months they can get the same benefit in the UK, they may instead be tempted to stay in the UK where they already have operations.”
The CSRC did not respond to AsianInvestor requests seeking comment.