Asset managers looking to domicile funds in Hong Kong to sell them into China face the challenge of creating products with simple structures and strong performance. So argues Lisa O’Connor, director of client coverage for RMB solutions at Standard Chartered.
The China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission (SFC) will sign a memorandum of understanding on the China-Hong Kong mutual recognition agreement (MRA) early this year. This is widely expected to happen no later than March.
For foreign fund firms busy building up local platforms to qualify under the scheme, investment return is a major obstacle, says Hong Kong-based O’Connor. “Fund managers have to consider factors including higher returns to attract Chinese investors. But there is a high hurdle rate: RMB appreciation and [typically high] onshore returns are things fund managers have to keep in mind.”
On top of a rate of renminbi appreciation forecast for 2014 at 2.58% by StanChart, fund managers will have to compete with onshore wealth management products (WMPs) – which tend to offer guaranteed returns – and money market funds (MMFs).
For example, Yu’e Bao – China’s biggest internet finance fund, which was attached to an MMF launched by Tianhong Asset Management – provides annualised returns of around 6%. For WMPs launched by banks, as of the week starting January 25, the expected annualised rate is above 5%, according to Chengdu-based consultancy CN Benefit.
Home bias will remain a problem at least for the short term, O’Connor tells AsianInvestor; fund managers must be prepared to educate domestic investors on the importance of asset diversification. “Foreign managers have to bring to China the concept of diversification,” she notes. “This education process has to be put into the sales process in China.”
When it comes to readying products for the MRA, O’Connor suggests “the simpler the better”: easy-to-understand asset classes and structures are likely to win approval first, and they will be approved case by case.
She advises fund houses to look to asset classes that can fill the gaps in the qualified domestic institutional investor (QDII) programme, such as products investing in European and single-market Asian funds.
The SFC does not specify the types of funds it expects to see apply for Hong Kong authorisation, apart from to say: “Considerable changes in the product nature and strategies of these [Hong Kong] funds are also expected to meet the needs of target investors in the mainland.”
In commission's 2014/2015 budget, released earlier this month, it estimates that more than 500 mainland funds will qualify under the MRA. However, the regulator does not specify how many Hong Kong funds will qualify, saying only that it expects an increase in the number of applications to domicile funds in the city.
The SFC also says the MRA “is expected to bring about fundamental changes to the types of funds seeking Commission’s authorisation once the implementation phrase commences”.