There are two factors that authorities need to get right if the pending HK-China mutual recognition scheme is to become an industry game-changer, a forum heard.
From an international fund managers’ perspective, the first is to ensure that initial products made available to Chinese investors are of suitable quality and meet their expectations. Otherwise there’s a risk of the project failing before it gets off the ground.
The second is to provide clarity around how long Hong Kong’s position as mutual recognition partner will be unique, to allow global firms to determine whether to set up a funds domicile in Hong Kong or use a more established platform such as Ucits.
The bullet-point exhortation was delivered at the Asian Financial Forum yesterday by Lieven Debruyne, CEO and head of Hong Kong intermediary business at Schroder Investment Management. The panel discussion was entitled “Hong Kong: Asia’s Premier Asset Management Centre”.
Debruyne suggested that if the initial products made available to Chinese investors were not of the right quality or didn’t provide the kind of outcome they expected, “You have the risk of losing a long-term gain right at the beginning.”
He cited the introduction of qualified domestic institutional investor (QDII) funds in late 2007 as a cautionary tale. “We do not want a repeat of some of the issues we have had to deal with on QDII,” he added.
He added that if mutual recognition became applicable to other countries after six months, then international firms would have to decide if there was any advantage to using a Hong Kong platform as against an established larger platform such as Ucits.
“Some clarity around how unique Hong Kong’s position in this would be important,” Debruyne added. “From that perspective clearly the sooner we get going [with the scheme’s launch] the better.”
Ding Chen, CEO and chief investment officer of CSOP Asset Management, said Chinese funds houses do regard the mutual recognition scheme as a game-changer for the asset management industry in both the mainland and Hong Kong.
She stressed her firm and others were closely monitoring and preparing for the policy implementation, describing it as a huge opportunity for local Chinese managers.
“We already know that through domiciling and issuing [product] in Hong Kong we can get access to the best quality global investors like big pension funds and sovereign wealth funds, which all buy Hong Kong products,” she said.
She highlighted the challenges that international fund firms will face when entering China, given that she and her colleagues are based in the country’s south and even they have difficulty understanding countrymen in the north.
But she added: “I can guarantee that international asset manager and local Chinese companies will have more and more chance to go hand-in-hand to develop this new market together.”
Alexa Lam, deputy CEO of the Securities and Futures Commission, had earlier reiterated that the mutual recognition scheme was in its final stretch.
She confirmed it had reached agreement with the China Securities Regulatory Commission (CSRC) on the scope of the project (i.e. which funds will be able to get into the scheme initially). They have also determined the eligibility requirements as well as issues around disclosure and investor protection.
The panellists subsequently reflected on the success of the renminbi-denominated qualified foreign institutional investor (RQFII) scheme, underscoring the strong potential of the renminbi and the attraction of the mainland market, said Chen.
She expressed the belief that the success of RQFII has a deeper meaning. “It has signalled to mainland authorities that RQFII actually works as a platform that linked up the mainland and Hong Kong markets. Mutual recognition has benefitted from the success of RQFII. As an avenue, no doubt [RQFII] will continue to expand.”
Debruyne suggested the rise of RMB deposits in Hong Kong made the city a natural base to develop RQFII product. What firms such as Schroders need to decide now, he said, was whether people want RQFII product purely for beta exposure to China or actively managed RQFII product that provides alpha.
Delivering the latter is difficult because of the proliferation of similar products, he noted, indicating that there is a need for fund houses to differentiate themselves.
That led him to conclude that RQFII was a great opportunity from an active management perspective because the deposit base is growing rapidly and people are increasingly using offshore RMB as an investment currency rather than a trading currency.