Asia’s fund landscape is undergoing an evolution led by Hong Kong in which managers' capabilities will become portable cross-border, incentivising regulators to sign bilateral agreements.
Philippe Ricard, head of asset and fund services at BNP Paribas Securities Services, presents this view as a more imminent development than the much-touted funds passport initiative.
He says Chinese managers operating in Hong Kong are driving the evolution. The fact they can invest clients’ money directly into China's interbank bond and equities markets via the RQFII scheme is turning Hong Kong into a place where managers can demonstrate a track record on their local capabilities to the global market place, suggests Ricard.
Just this April, Chinese regulators approved an additional Rmb50 billion quota to 22 approved RQFII managers in Hong Kong to launch RMB-denominated exchange-traded funds (ETFs).
Ricard believes the next step for these ETFs will be cross-listings across Asian exchanges which could, in turn, promote their cross-border regional distribution.
“We are seeing a lot of interest from Chinese asset managers looking to develop ETF funds who want to use ETFs as a vehicle to capture the growth of the offshore RMB-denominated investment funds market," notes Ricard.
"These managers want to develop their capability in ETFs in preparation for regulators potentially relaxing the RQFII scheme to also allow for direct investment into Chinese equities."
RQFII is a government initiative to facilitate a more balanced two-way flow of offshore renminbi between Hong Kong and mainland China. The ability of managers to invest CNH in China’s markets has encouraged offshore investors to hold RMB-denominated assets in the hope of high returns. The RQFII rules give precedence to Hong Kong domiciled funds over other jurisdictions.
Mostapha Tahiri, head of asset and fund services Asia at BNP Paribas Securities Services, likens the development of the Hong Kong funds industry to that in France before the cross-border Ucits scheme was introduced.
He notes that France-domiciled mutual funds, Fonds Commun de Placement (FCP), cater to specific market demand, with FCP becoming a key fund type domiciled in Luxembourg.
“[The French] regulators are facilitating this by providing the right framework for the industry to develop beyond the border,” adds Ricard, adding that the growth path for France, a domestic market worth €2 trillion, is possible for Asian markets such as Hong Kong.
Tahiri argues that China-exposed funds managed by houses in Hong Kong and China are a strong-enough brand in themselves to drive demand from global institutional investors.
One day these houses could be considered for international mandates to sell their products to overseas institutional investors including pension funds, potentially under the Ucits framework.
Indeed, Chinese managers’ interest in looking at the Ucits structure is seen as increasing.
Paul Moloney, partner and foreign registered lawyer for Dillon Eustace, says as Chinese fund managers have developed their international operations they have increasingly looked at jurisdictions such as Dublin as a domicile for Ucits and Qualifying Investor Funds.
“We see a lot of interest from Chinese asset managers who are based in Hong Kong in wanting to distribute internationally through a Ucits structure," he notes.
"The ease of distribution in Europe following the implementation of Ucits IV and the ability to register Ucits funds for sale in key Asian jurisdictions such as Hong Kong and Singapore make Ucits an attractive proposition for Asian managers."