Asian fund industry professionals are growing frustrated that the concept of mutual recognition is not being properly adopted by China's regulators just as foreign fund managers ramp up their activity on the Chinese mainland in anticipation of more open markets.
One key stumbling block relates to product approvals, which is granted by the China Securities Regulatory Commission (CSRC).
Stewart Aldcroft, Citi's senior adviser on fund industry issues, confirmed there was still concern about the slow pace of approvals.
"The industry presumes that the CSRC [has] been told not to approve products, possibly by Safe [the State Administration of Foreign Exchange] because of a perception that there will be a further significant outflow of capital from the mainland," he told AsianInvestor. "So even though there is a quota (for the programme), you can’t use it."
Aldcroft added that he felt China was being unnecessarily difficult about progressing the mutual recognition of funds (MRF) programme, jointly launched with the Hong Kong Securities and Futures Commission (SFC) more than three years ago.
"This is something they agreed upon -- even agreed a quota and then they are not allowing fund groups to do anything. That’s not a partnership," he said.
Under the MRF scheme, first implemented in July 2015, 50 southbound (China to Hong Kong) funds have so far been authorised by the SFC and 15 northbound funds have been approved by the CSRC. Not all of these funds have been brought to market yet and sales under the MRF programme only started to take off in 2018.
Even then, total sales last year across both channels amount to less than 5% of the approximately $50 billion total quota set for the scheme, according to market data firm Broadridge.
Aldcroft is by no means alone in thinking the Beijing authorities are dragging their feet.
Effie Vasilopoulos, Hong Kong-based partner at law firm Sidley Austin, told AsianInvestor she has also “heard rumours to this effect and certain projects that we had in the works have stalled pending some loosening of [Chinese government] policy. This has not yet materialised.”
While some improvement in fund flows through MRF was seen in the second half of 2018, Vasilopoulos said that “in general, much of the initial buzz surrounding this initiative has waned, as the participants come to grips with the real challenges posed by the relative lack of branding, profile and track record in China."
"Building this takes time, money and patience," she added, "and for many, the road to success has been much more challenging than originally contemplated.”
LONG WAITING TIMES
Rex Lo, managing director of business development at BEA Union Investment Management in Hong Kong, said his firm began their MRF strategy two years ago and so far have had two products approved.
“In terms of the approval process, it is not that complicated, but there is a long waiting time. It’s been quite a lengthy process and there was a long period spent in ‘pending’ mode,” he told AsianInvestor.
“The regulator didn’t mention the reason why the application was kept pending for so long, but from a fund manager’s point of view, if you decide to apply for authorisation, that’s a policy risk you have to bear,” Lo said.
MRF alone is unlikely to be a successful strategy for offshore northbound fund groups, Lo added. BEA Union sees it as a means to get its brand and capability across to the mass market.
“However, I think the amount of assets I could raise from MRF is limited by our total fund size. We can only raise assets from China for any fund according to an equal amount that we have offshore," he said. “So from a commercial point of view, I see northbound distribution as a good way to penetrate the onshore market."
With the qualified domestic institutional investor (QDII) programme suspended, MRF represents a potential alternative to distributors looking for new products as there are limited offshore investment products available in China, Lo added.
The authorisation delays are compounded by the vagaries of the political environment in China, which can affect capital controls and general economic conditions, sometimes in a positive way, but more often than not in a negative way from a regulatory standpoint, Vasilopoulos said.
“There remains an ever-present risk that Chinese government policy, as it affects this product, can change dramatically and on short notice, based on a range of factors, both economic and political," she said. "This uncertainty is well understood by the players in the market but remains a challenge to progress nonetheless.”
Aldcroft echoed this sentiment, saying: “Anyone in financial services who knows what is going on in China understands there are all sorts of blockages that have been set up, artificial and otherwise. It would obviously be desirable to have some of them removed but there is a recognition that China is very slow at doing anything.”
HONG KONG RESPONSE
Hong Kong's Investment Funds Association has studied the issues hindering progress on the MRF and has proposed enhancements to the scheme. Its key recommendations include a relaxing of the 50% sales limit (currently, at least 50% of investments in each MRF northbound fund must come from Hong Kong investors); allowing managers to delegate investment management functions to fund managers outside Hong Kong; and efforts to expedite the approval time.
In association with consultancy firm EY, the HKIFA issued a report last November proposing an extension of fund management opportunities in the Greater Bay Area (which comprises Hong Kong, Macau and nine cities in Guangdong province). This would be a boost for both mainland and offshore managers and would address some of the scale challenges faced by northbound fund managers in particular.
"Ultimately, we want to see MRF succeed by serving the best interests of investors in both markets," HKIFA chief executive Sally Wong told AsianInvestor. "The current restrictions mean that in effect, very limited choices can be made available to investors on the mainland. Also, you need to have a sufficiently wide array of choices before distributors in China would deploy resources to educate their investors and to promote products under this scheme."
For the southbound funds, Wong said "it is less of an issue because Hong Kong investors can already get exposure to mainland A-share and bond markets via other channels, such as the Renminbi Qualified Foreign Institutional Investor (RQFII) programme."
In April 2018 at the annual Boao Forum, Chinese President Xi Jinping and the governor of the People's Bank of China (PBoC), Yi Gang, announced plans to open up the financial services sector as part of an extensive reform programme.
“That was very exciting for someone like me who has been pushing for an opening up of the market,” said Sherry Madera, special adviser for Asia with the City of London Corporation, which administers Europe’s principal financial hub. She told AsianInvestor she now sees "a definite slowing down of that reform momentum. Obviously now the trade war is putting a huge amount of pressure on foreign exchange and on interest rates. And that’s affecting the thinking at the PBoC and with regulators in central government.”
There is little prospect of much progress in 2019, according to Vasilopoulos at Sidley Austin. “At the moment, momentum has slowed significantly, as capital outflows continue to be squeezed significantly across the spectrum of asset classes,” she said.
The CSRC did not respond to a request for comment when approached by AsianInvestor.