Chinese fund houses have tended to base their main international branches in Hong Kong, but a rising number are considering establishing a presence in Singapore instead, amid concerns over regulatory risk on the mainland.
In the past six months alone, US law firm Sidley Austin has been working with at least 25 Chinese asset management firms keen to set up an office in the Lion City.
“The default choice for Chinese fund managers has been Hong Kong for a long time – now that’s not necessarily the case,” said Effie Vasilopoulos, Hong Kong-based co-head of investment funds for Asia at Sidley Austin. It used to be chiefly Japanese asset managers establishing offices in Singapore, she noted; now more and more mainland firms are joining them.
Sidley Austin is increasingly talking to mainland fund houses about Monetary Authority of Singapore (MAS) requirements for licensing and infrastructure, confirmed Ho Han Ming, Singapore-based co-head of investment funds for Asia.
This is partly down to a growing perception that there is a heightened regulatory risk and growing number of restrictions for both domestic and foreign players in China, noted Vasilopoulos. Beijing's recent regulatory clampdown on private funds is a clear recent example.
The agreement signed in October 2014 by the CSRC and SFC on strengthening regulatory and enforcement cooperation around the Stock Connect scheme has also had a major impact, she added. While the agreement appears to be centred on Stock Connect, she noted, its parameters are very wide and include broad requirements around notifying suspected cases of misconduct and disclosure of information.
In some ways the agreement is sensible, because such activity is cross-border in nature and there is a sound logic in evaluating such transactions on a holistic basis, said Vasilopoulos. Nevertheless, this approach is fuelling movement out of China and Hong Kong to Singapore.
Singapore reaping the benefit
For the reasons above, it appears to be a compelling argument for Singapore to act as the “natural offshore” domicile for Chinese managers outside the mainland, added Ho.
Moreover, Singapore has made a smart move in positioning as a hub for the renminbi qualified foreign institutional investment (RQFII) cross-border scheme, with Beijing recognising it as a legitimate RQFII centre, said Vasilopoulos. The Lion City is a clear alternative to Hong Kong in this space, and is benefiting from a perspective that it is independent from China, she noted.
Singapore may also provide business-diversification benefits. she said: “In good times [for the mainland], it’s enormously beneficial for Hong Kong to be heavily engaged with the China market.”
But when there is a significant economic slowdown in China, the converse is also true, she pointed out, meaning that diversifying one's business into other markets could provide an effective “downside hedge”. Singapore has benefited from this dynamic, Vasilopoulos added.
Moreover, recent MAS speeches and initiatives suggest Singapore is attracting Chinese managers to establish a significant presence there to cover wider the whole region, not just Southeast Asia, said Ho.
Indeed, Ravi Menon, managing director at the MAS, said last week that there was a growing cluster of Chinese asset managers keen to set up in the city-state, attracted by its "pan-Asian focus and broad base of international investors".
All that said, if a US fund house is heavily targeting business in China and Hong Kong as its main reason for establishing a presence in Asia, it is still likely to set up in Hong Kong, noted Vasilopoulos. But it is getting to a point where foreign managers might at least consider whether it is better to set up in the Lion City.
Servicing wealthy Chinese
Other lawyers said they were not aware of the level of interest in a Singapore presence seen by Sidley Austin, but argued that it would be a logical move.
Mark Shipman, global head of funds and investment management at Clifford Chance, said he hadn’t seen a large flux of Chinese fund houses specifically looking to set up in the Lion City, but said it would not be surprising that some might do so.
“A significant portion of wealthy Chinese put their money in Hong Kong because they like the fact that it’s close. On the other hand, many go to Singapore, because they think Hong Kong’s too close,” noted Shipman. He suggested mainland managers may be looking to service the latter group.
Yet Hong Kong remains a big draw for such firms, he noted. “[Hong Kong’s] Securities and Futures Commission is busier than it’s ever been with licence applications, and a lot of that is coming out of China.”
Indeed, Josephine Chung, director of Hong Kong-based consultancy CompliancePlus, has said that SFC resources are under pressure from the level of such activity.
Meanwhile, for Chinese fund houses that already have an offshore presence in Hong Kong, Shipman said he thought the next most obvious stop would be London or Luxembourg – though this may depend on the outcome of Britain’s June 23 referendum on whether to remain in the European Union.
Rolfe Hayden, Hong Kong-based head of the financial markets group for Asia at Simmons & Simmons, said he was not aware of Chinese fund firms bypassing Hong Kong, but that there had always been managers that have done so.
“I can see the logic to it [them setting up in Singapore] as those mainland managers we see setting up in Hong Kong now are very interested in launching international products that don’t focus on China,” he said. “Also, maybe Singapore is considered one step removed from China.”
Hayden said he has heard a view in the market that many wealthy mainlanders don’t consider Hong Kong to be safe. “So I can see if you’re looking to raise money from high-net-worth individuals in China to invest outside the country, then basing yourself in Singapore may add a certain marketing edge.”