Asset managers expect Hong Kong to become Asia’s leading cross-border funds domicile ahead of Chinese cities and  Singapore, despite challenges they envisage for the territory, finds a global survey due to be released today by custody bank Brown Brothers Harriman.

They are bullish on Hong Kong as a result of its links to mainland China, despite the slow take-off of the mutual recognition of funds (MRF) passporting scheme.

But they flag regulation, product registration speed (or lack of it) and distribution channels as the three main obstacles to Hong Kong becoming a leading funds hub (click on first graph, below left). 

The question of how offshore managers can effectively distribute products in China is a long-standing major concern. 

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In respect of regulation,  the planned introduction of  open-ended fund companies (OFCs) will boost Hong Kong's appeal to international asset managers, said  Sean Tuffy, Dublin-based head of regulatory intelligence at BBH.

Indeed, 55% said the introduction of OFCs would be an important move to help bolster the city’s attractiveness as a product domicile. Hong Kong’s Legislative Council passed the Securities and Futures Bill in June, which will introduce a new OFC structure.

Indeed, BBH estimates that funds under management in Hong Kong to more than quadruple in size to $627 billion by 2025 from $146 billion as of the end of last year.

Hong Kong to lead the way?

Around half (53%) of respondents expect the city to be the leading cross-border fund domicile by 2025, well ahead of China (27%) and Singapore (18%).

“It is a reflection that Hong Kong is a gateway to mainland China,” Tuffy told AsianInvestor. “It is also probably a reflection on Singapore and that the Asean CIS [collective investment scheme] has not been particularly successful in gaining traction in the past couple of years.”

A further factor may be that Singapore, for the time being, has withdrawn from the Asia Region Funds Passport (ARFP) initiative, he told AsianInvestor.

It is hardly a surprise that China plays a key role in such expectation, noted the report. Seven in 10 respondents said China was very or extremely important to their strategy, while 63% said the Hong Kong-China MRF scheme was very important for Hong Kong as a funds domicile.   

Northbound (Hong Kong-domiciled) MRF products may be seeing slow progress in terms of approvals, but Tuffy expected it to pick up pace. 

He suggested the planned ETF Connect would be a key development in this regard in 2017. He felt it had been underplayed by the media in comparison to, for instance, the issue of inclusion of China stocks in MSCI’s emerging-market indices.

Northbound approvals tipped to pick up

Despite the optimism about the HK-China MRF, industry participants in the city have voiced frustrations over the slow pace of Hong Kong product registrations. The Chinese regulator has approved only six Hong Kong funds since December last year, and nine funds have been awaiting a green light for more than a year.

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Indeed, some industry participants are frustrated that Hong Kong’s Securities and Futures Commission has inked a new fund passport scheme with Switzerland before the original `HK-China MRF is properly operational from a Hong Kong perspective. 

In the survey, 31% of respondents said Hong Kong should expand the link to other Asian domiciles, but another 31% argues the city should maintain it exclusively with China (see graph, right).

*The report surveyed 52 asset managers in October. Overall, 24% are based in the US, 20% in HK and 15% in UK, 11% in China, 9% in Japan, 5% Luxembourg, 2% Australia, 2% France, 2% Ireland, 2% Netherlands, 2% Singapore, 6% other.