Hang Seng Bank is to set up a majority-owned joint venture fund management firm in Shenzhen’s Qianhai economic zone, becoming the first offshore institution to gain a controlling stake in mainland China.
It has been seen as a significant relaxation of policy to allow foreign firms to enter China’s funds industry.
The HSBC subsidiary and Qianhai Financial Holdings, a wholly-owned unit of the Administrative Bureau of Qianhai, announced an application for a mutual fund licence last Friday (July 24). The joint venture will conduct mutual fund sales and asset management business, and will target both individual and institutional clients.
Andrew Fung, Hang Seng’s executive director and head of global banking and markets, told Hong Kong media that both parties have been discussing the buildout for 11 months. The application is being considered by the China Securities Regulatory Commission (CSRC), but Fung declined to comment on how many shares Hang Seng will hold in the JV.
Fung told media that the bank is expecting to build the team in six months after receiving regulatory approval. He added that its subsidiary Hang Seng Investment Management had built strong capabilities in index funds and ETFs, so the bank wanted to develop its strengths in the mainland JV.
Hang Seng’s controlling stake is based on the Closer Economic Partnership Arrangement (CEPA) Supplement X, which was signed by the Hong Kong and mainland Chinese governments in August 2013. This rule allows qualified Hong Kong-funded financial institutions to set up JV fund management companies on the mainland.
“It is indeed a very significant move that the mainland financial industry is opening up to offshore players, although this is a relatively small step,” said Ivan Shi, research manager at Shanghai-based consultancy Z-Ben Advisors. “Once this happens, the process can only go forward.”
Shi added that the definition of a Hong Kong-funded financial institution was not yet clear. The definition will decide what kind of firms can take advantage of the liberalisation - for example, whether HSBC can be regarded as a Hong Kong-funded institution.
CEPA Supplement X also allows Hong Kong-funded financial institutions to set up one fully-licensed joint venture securities company in Shanghai, Shenzhen and the wider Guangdong province.
Backed by Beijing, Shenzhen’s Qianhai is a financial development zone and a test-bed for renminbi convertibility and the mainland’s liberalisation programme.
Foreign asset managers were initially allowed to own a 33% stake in a JV fund company after China became a member of the World Trade Organisation in 2001; this was raised to 49% in 2004. So far, 45 out of 97 Chinese fund companies are Sino-foreign JVs, according to CSRC data as of June 30.
Sino-foreign JVs have been a traditional route for entering China over the last decade, but they have fallen out of favour in recent years. Part of the problem has been that partners have had different visions for their business strategies, with different management cultures.
Meanwhile, foreigners have seen the rapid changes in regulations as providing more routes for accessing China. For example, the CSRC is expected to allow wholly foreign-owned enterprises (WFOEs) to operate in the same way as private fund companies. Some global fund companies such as Franklin Templeton are considering the establishment of a WFOE as a servicing platform for institutional clients.
Another route is through new cross-border schemes such as Shanghai’s QDLP (qualified domestic limited partnership), which plans to expand from overseas hedge funds to mutual funds. Global asset managers like BlackRock and UBS Global Asset Management have won a QDLP licence this year.
The China Banking Regulatory Commission also issued a proposal in April to liberalise foreign institutions’ holdings in domestic trust companies. It will allow foreigners to have controlling stakes in trust companies, compared to their current ownership limit of 20%.