Product development in Hong Kong looks set to be revamped as a result of the upcoming mutual recognition scheme, according to Chinese asset managers.
This will have implications for their utilisation of RQFII quotas, as Hong Kong units of mainland firms face the dilemma of their own funds competing against their parent’s southbound products under the new scheme.
This may offer Hong Kong managers who have exhausted RQFII quotas the chance to develop new products, but also presents the risk of cannibalising their mainland parent companies’ sales.
Although as many as 850 mainland Chinese mutual funds are potentially eligible for Hong Kong distribution under mutual recognition, not all domestic managers are prepared for the scheme, which will go live on July 1. Perhaps 15 out of 96 Chinese asset management companies will offer products on the southbound fund passport scheme in the early stages, according to Shanghai-based consultancy Z-Ben Advisors.
China Asset Management, China International Fund Management, Invesco Great Wall, China Merchants Fund and GF Funds Management told AsianInvestor that they have identified their eligible funds and plan to participate in the scheme in the initial stages, either through their Hong Kong subsidiaries or the foreign shareholders in their joint venture partnership. But some large managers such as Harvest Funds and E Fund Management do not have a product offering plan at this stage.
Z-Ben noted that Chinese managers with Hong Kong subsidiaries, which have experience in navigating Hong Kong distribution and connections to global institutional investors, will be the potential winners. Yet the new fund pact scheme could change some managers’ product development plans.
“Those managers of Hong Kong units who invested heavily in offering [China-focused] products via RQFII [renminbi qualified foreign institutional investor] quotas may find the products from parent companies could cannibalise their own sales,” noted Z-Ben.
Stephen Baron, deputy director of strategic solutions at Z-Ben, said that there could be different outcomes for managers, depending on their situation.
“For those [Hong Kong-based China] managers who have exhausted their RQFII quotas, it may be an option [to offer new products], but for the other managers it would be direct competition because it would be selling China-focused products in completion with their RQFII [products],” he said.
“Investors will determine which fund is cheaper to buy in terms of management fee, but the cost of access through QFII and RQFII is higher than launching a domestic fund [from China].”
“Those subsidiaries in Hong Kong who have not been successful in marketing their RQFII products may switch to marketing their mainland products.”
GF International, the Hong Kong arm of Guangzhou-based GF Fund Management, is likely to be switching its product plan.
“With the expectation of mutual recognition, we are not going to launch any actively-managed retail fund [both equity and fixed income] in Hong Kong in anticipation of competition with those funds managed by the parent company,” said Nathan Lin, chief executive of GF International. “If we can introduce some strategies and funds from the parent company, and those funds have good track records, why bother to launch similar strategies or funds in Hong Kong?”
As a latecomer to the Hong Kong retail fund market, Lin has found difficulties in marketing its first RQFII fund because Hong Kong regulation does not allow reference to funds which are not authorised by the Securities and Futures Commission (SFC). “With mutual recognition, we can market those particular funds managed by our parent companies and authorised by SFC via mutual recognition,” he added.
GF International received its licence from the SFC in September 2011 and launched its first retail RQFII fund in December 2013. The firm offers two actively-managed retail funds in Hong Kong, and teamed up with Global X in listing a bond exchange-traded fund in New York last November. The firm plans to offer an China A-share equity ETF in Hong Kong later this year.
GF Fund managed Rmb181 billion ($29.2 billion) in mutual funds AUM as of the end of March 2015. The firm estimates 29 of its funds are eligible for mutual recognition and is studying the details of the system’s operations and compliance issues.
Z-Ben expects most Chinese fund products to be offered in Hong Kong through mutual recognition will be equity ETFs. But Chinese managers are likely to be questioned on their operational issues and weaknesses in the Hong Kong market, such as their high management turnover and inconsistency over product focus.
The consultant predicts Chinese managers will source about $6.5 billion from Hong Kong in the first six months of mutual recognition, far less than its prediction of $30 billion fund inflows that Hong Kong managers could generate via northbound sales.