AsianInvestor's regulatory round-up, Apr 3

China said mulling Fatca-like scheme; QFII/RQFII ownership rules eased; mutual recognition requirements "agreed"; HK SFC warns on Fatca; UK tax to hit foreign property investors; ICI Global publishes research.

China: Mainland said mulling Fatca-like scheme
China is said to be considering implementing a scheme like US’s Foreign Account Tax Compliance Act (Fatca) to combat tax evasion by Chinese nationals, reported the South China Morning Post last Friday (March 28).

With tax evasion on top of the agenda for members of the Group of 20 countries, the next step after the implementation of the US’s Fatca is to have the system “multilateralised”, Richard Weisman, a lawyer at Baker & McKenzie, was quoted as saying.

He reportedly suggested that China is said to want to have reciprocal access to account information of its citizens abroad. This would mean foreign governments would share account information of Chinese citizens abroad, including in Hong Kong, with the mainland government.

While such a plan would affect Hong Kong, with mainlanders less keen to deposit money in the city, it would be no worse off than other non-Chinese jurisdictions, Patrick Yip of Deloitte told the SCMP.

China: Easing RQFII/QFII stock ownership rules
The Shanghai Stock Exchange on March 19 eased restrictions on foreign investors buying mainland stocks with a view to encouraging more flows into the Chinese market.

The limit on aggregate ownership of a mainland listed company by qualified foreign institutional investors (QFIIs) and renminbi-qualified foreign institutional investors (RQFIIs) is now 30%, up from 20%.

The scope of investment products has also widened beyond vanilla securities, such as equities and bonds, to include asset-backed securities and bonds issued by Chinese policy banks and preferred equities.

Hong Kong: mutual recognition requirements "agreed"
The final touches are being put to the Hong Kong-China mutual recognition agreement for funds, reports Reuters. Under the plans, Hong Kong-domiciled funds may be sold into the mainland and vice versa for Chinese funds into the SAR.

“We have agreed with the [China Securities Regulatory Commission] on all the requirements,” Alexa Lam, deputy chief executive of Hong Kong’s Securities and Futures Commission, was quoted as saying at the Fund Forum Asia in Hong Kong on Tuesday (April 1).

“Once the final administrative measures have been dealt with, we will make a joint announcement.”

Hong Kong: SFC warns product issuers on Fatca
Fund houses in Hong Kong have been warned by the city’s securities regulator to “critically consider and assess” the implications of the US's incoming Foreign Account Tax Compliance Act (Fatca).

The law will require non-US financial institutions to share information on their US-based clients and is expected to be implemented by July.

A circular from the Hong Kong Securities and Futures Commission (SFC) in late March reminded issuers of SFC-authorised funds of their duty to ensure that offering documents are up-to-date and contain information relevant to their Fatca compliance status.

Among other things, the offering document should disclose a description of the Fatca regime, the issuer’s Fatca compliance status, any withholding tax implications and other Fatca disclosures.

The Hong Kong government is in discussions with the US Treasury as the city looks to sign an intergovernmental agreement, which would help ease reporting requirements for non-US financial institutions, according to the SFC.

The city’s Financial Services and Treasury Bureau signed an agreement in advance of Fatca on March 25, to provide information to the US upon request.

Similarly, India’s Securities and Exchange Board of India is said to be issuing new guidelines for market intermediaries, reports India’s Live Mint. Negotiations between India and the US have reportedly started, with the aim of reaching an intergovernmental agreement.

UK: Capital gains tax set to hit foreign property investors
Asian investors in UK property have been advised to seek alternative holding structures in anticipation of capital gains tax scheduled to take effect in April 2015. Law firm Withers says the planned tax could hit flows into UK real estate.

A consultation on the extension of capital gains tax (CGT) to non-residents holding UK residential property was announced last Friday and is due to close on 20 June.

It is proposed to apply CGT to gains made not just on personal-use property but also on residential rental and investment properties. The rate of CGT will be 18% or 28% depending on whether the individual is a higher-rate taxpayer for UK income tax purposes.

UK real estate has become a popular investment for Asian high-net-worth individuals, but Withers warns that the CGT might reverse that trend.

“The UK is fundamentally changing its approach to capital gains tax and non-residents, which will have a significant impact on almost all non-resident property owners,” says Katie Graves, Hong Kong-based partner at Withers.

“This will be an interesting test of how much Asian HNWIs are in UK property for the long term or whether we see a flurry of sales in the next 15 months,” she adds. “Equally, this gives a good window for alternative holding structures to be explored.”

Asia: Regional mutual fund assets rise to $3.3 trillion
Investment industry body ICI Global has published research detailing growth of the mutual fund markets globally over the past two decades.

It discusses the prerequisites for such growth – which include strong, appropriate regulation and capital markets – and factors such as a country’s economic development and demographics and whether it has a defined contribution plan that allows participants to invest in mutual funds.

Mutual fund assets under management in Asia Pacific have grown 450% since 1993 to $3.3 trillion as of the third quarter of 2013. This is slower than global AUM growth, which saw a sevenfold rise from $4.0 trillion in 1993 to $28.9 trillion over the same period.

Still, mutual fund markets in developing countries have the potential to grow rapidly as their populations mature, their middle classes expand and investors better understand and desire the benefits of domestic and international diversification that mutual funds can provide, says ICI Global.

Wealth and income are expected to rise substantially in developing countries such as China, implying that mutual fund assets have the potential to grow considerably, adds the report.

Meanwhile, asset allocation continue to vary widely across Asia. In Japan, 83% of long-term mutual fund total net assets were allocated to equity, with the rest in bonds. China’s figures were 54% in equity, 15% in bonds and 30% mixed or other assets. Korean allocations were 30% equity, 23% bonds and 47% mixed/other. India’s were 30% equity, 61% bonds and 9% mixed/other.

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