A proposal by Hong Kong's central bank for fund managers to shift back-office operations to Qianhai is overly ambitious and will only succeed if government incentives are provided, say industry figures.
The plan was put forward by Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, at an industry event late last week. Qianhai is a 15 km² financial development zone and a test-bed for cross-border renminbi business in Shenzhen.
Beijing has backed Qianhai to become the Manhattan of the Pearl River Delta and launched a pilot scheme for the area as part of its measures to promote renminbi convertibility.
The hope is that by allowing Hong Kong institutions to offer RMB business, the currency will flow cross-border more freely, enabling Hong Kong banks, for example, to offer RMB loans to corporates in Qianhai. Another aim is to better integrate the services sectors in Shenzhen and Hong Kong.
Pang argued that fund managers registered in Hong Kong would be following the operating model of numerous Asian investment funds domiciled in Luxembourg or Dublin if they separated front- and back-office functions. While such funds often keep back-office operations in these jurisdictions, front-office functions including investment and trading are typically done in Asian markets.
“Considering the comparative advantages between Hong Kong and Shenzhen, front-office functions of distribution and investment management can be done in Hong Kong, while mid- and back-office functions could be located in Qianhai,” suggested Pang at the event.
But he conceded that any benefits would ultimately depend on authorities in Beijing and Hong Kong developing a China “funds passport” scheme, granting reciprocal rights of distribution and sales on both sides of the border.
Incidentally, a State Council document approving the Qianhai plan late last month encouraged the development of private equity funds in the zone set up by Hong Kong registered fund managers.
But Lawrence Au, Asia-Pacific head of BNP Paribas Securities Services, describes the HKMA proposal as overly ambitious, given that managers in popular fund domiciles such as Luxembourg and Dublin can take up to two decades to attract talent -- and even then tend to provide specialised services such as fund accounting for private equity or legal services.
“If these talent pools and infrastructure are to be built from scratch, one cannot expect instant and quick success, particularly when it remains uncertain whether a China fund passport will be agreed between Hong Kong and Chinese authorities at all,” says Au.
He also points out that the majority of China fund managers are situated in Shanghai and Beijing; and in Tianjin for private equity.
Au suggests that custodian banks would not see any advantage in having a presence in Qianhai, when they could choose Shanghai or Beijing instead.
“For now foreign custodian banks are limited to offering their services to cross-border investment schemes of qualified foreign institutional investors [QFII] and qualified domestic institutional investors," he says.
When it comes to Hong Kong private equity funds being established in Qianhai, Yong Ren, a partner of Mayer Brown in Hong Kong, notes that the registration of PE funds in China still needs to meet various local requirements.
“Operation of the capital flow [offshore RMB into the mainland] under the Qianhai scheme assumes that it has been approved by the State Administration of Foreign Exchange as otherwise there are still restrictions on RMB's movement [from Hong Kong] into the mainland,” says Ren.
But he adds that the chief challenge for PE funds under the Qianhai scheme is whether they will get "national treatment" -- in other words whether such RMB funds can ultimately be treated as domestic funds and make investments without the commerce ministry's approval.
Such treatment is denied to funds set up under the qualified foreign limited partner (QFLP) pilot programme, which allows offshore fund managers and investors to convert US dollar or other foreign currency into renminbi for investments into onshore renminbi funds under a pre-approved quota.
In China, PE funds are permitted to be set up in corporate, contractual or limited partnership form, and need to be registered with the local administration of industry and commerce. A PE fund with commitments of over Rmb500 million is required to file with the National Development and Reform Commission.