Reality appears to have bitten for the Hong Kong-China mutual recognition of funds (MRF) scheme, on which AsianInvestor wiill host a live webinar* this coming Wedneday.
When the securities regulators of Hong Kong and mainland China introduced the cross-border scheme on May 22 last year, it was hailed as a breakthrough for the development of Asia’s asset management industry.
Mainland stocks were booming at the time; the benchmark CSI300 index had surged 62% between early February and early June 2015, while ChiNext, Shenzhen's Nasdaq-style board, had grown 133%.
But the CSI300’s then plunged 44% in some two months to August 26, to trough 8.6% below where it had been in February. It encapsulated investor fears after China’s central bank devalued the renminbi without warning in early August.
And since the start of 2016 a stream of bad news has sent mainland and global equity markets tumbling. Oil prices have continued to slump and China confirmed its GDP growth had slowed to a 25-year low.
These days the sense among product providers and distributors is that the near-term prospects for the scheme – both northbound into China and southbound into Hong Kong – are constrained.
Due to the volatility of mainland stocks and near-term doubts over its transition to a consumer-driven economy, distributors in Hong Kong admit that onboarding MRF funds is more an exercise in public relations than a business proposition right now.
“MRF is more symbolic than for us to reap actual benefits,” said Rocky Cheung, head of investment advisory for Hong Kong wealth management at DBS, which has four southbound MRF funds on its shelf. “It’s a good move, but we will not benefit from fund sales initially.”
Alan Ng, managing director for retail and mass-affluent business at Convoy Asset Management, said the independent financial advisory firm planned to onboard up to four MRF funds so it had “talking points” with the media and clients.
“From the industry’s perspective, MRF is good as it will develop Hong Kong into a fund manufacturing centre,” said Ng. “But from a sales perspective, it is not really interesting. It will not bring in business in the short term.”
Like many market participants, Ng hopes that when sentiment on China changes, flows will start to accumulate in southbound MRF funds. Valuations on ChiNext have fallen from an average price-earnings ratio of 133x in early February, although even now they are 57x.
However, there is greater optimism for the prospects of northbound MRF funds, given the size of China’s retail market and investor need for offshore exposure. Cheung of DBS noted that MRF will benefit DBS in China, due to northbound flows, more than in Hong Kong.
And yet more southbound than northbound funds have been applied for and approved, given expectations of non-existent demand in Hong Kong.
Just three Hong Kong-authorised funds have been approved by the China Securities Regulatory Commission, with 14 applications awaiting confirmation. By comparison, 25 China-authorised funds have been approved in Hong Kong, with at least five more in the pipeline.
Southbound participants are large Chinese fund houses, many of which have joint-venture operations with global firms. They are eager to internationalise, in line with the pervading mood in the mainland.
Stewart Aldcroft, senior adviser at Citi in Hong Kong, said: “Initially mainland firms are just looking to start their experience of becoming international, so Hong Kong is their easiest way to get going. It’s about gaining experience. Essentially these fund houses do not expect much. They want it [MRF] as a shop window.”
Should they sit and watch developments from the sidelines or enter the MRF scheme and seek to get ahead as an early adopter? That is dilemma fund houses face now, and it turns on the question of whether will MRF be sustainable from a cost perspective. (See part II tomorrow: MRF providers left counting the cost.)
* AsianInvestor readers can register here for our webinar 'Getting ready for the MRF', which will start at 2pm Hong Kong time on February 17.