Hong Kong’s securities regulator has urged managers in Hong Kong and mainland China to prepare for a major breakthrough in cross-border distribution: a platform to facilitate the launch of RMB mutual funds in each others’ domestic markets.
News of the initiative was delivered in a speech yesterday by an evidently excited Alexa Lam, deputy CEO of the Securities and Futures Commission (SFC), during a forum hosted by the Hong Kong Securities and Investment Institute.
Under the arrangement, Lam says she envisages that qualified SFC-authorised funds domiciled in Hong Kong will become “recognised Hong Kong funds”, while counterparts in China would become “recognised mainland funds”. These could then obtain authorisation and be sold directly in each other’s market.
Anticipation of such a scheme may go some way to explaining why fund managers including BlackRock have been hastening to build a domestic funds platform in Hong Kong, as reported exclusively by AsianInvestor.
“My vision is for the mainland and Hong Kong to build a mutual recognition platform for our public funds,” says Lam.
With capital account restrictions in China, the cross-selling of funds has been off limits, with no channel for Hong Kong funds to sell directly to mainland investors, nor for investors outside China to invest in mainland funds.
But Lam stressed: “The mainland-Hong Kong mutual recognition initiative will open the gate to this mutual traffic flow, for the first time. This will be a very substantial breakthrough.”
She says the scheme will make creating funds, seeking authorisation and selling them in the two jurisdictions a streamlined and easier process, saving cost and time.
And she urges fund houses in both Hong Kong and mainland China to start thinking about which products would be suitable, why they would be suitable and which investors they would target.
“Over the years a number of you have complained that our market in Hong Kong is too small for you to enjoy economies of scale for building your fund domicile here,” she goaded the audience of fund managers yesterday.
Saying the SFC was looking at what would be an appropriate regulatory framework for a fund domicile, she adds: “The Hong Kong-mainland fund platform that we are building will likely be Asia’s largest and deepest. I hope you will complain no more.”
On the question of the timing for such a scheme she is non-committal, pointing out that as mutual recognition will involve cross-border RMB flows, the initiative will need detailed consideration by mainland authorities.
She notes that this will take time, and that the launch of the initiative will be influenced by the macroeconomic climate.
She also pours cold water on the prospects of a fund-passport system between Hong Kong and the mainland, saying this will not happen in the near term.
“We cannot be overly ambitious,” she states, pointing to mainland capital account restrictions and a currency that is not fully convertible. “We must first start with a mutual recognition programme.”
Lam does acknowledge the potential risks of such a scheme, but is confident about cross-border cooperation in terms of information-sharing and enforcement.
And she stresses that the SFC has been working closely with the China Securities Regulatory Commission on licensing and supervision issues relating to SFC-licensed firms whose parents are on the mainland. The SFC has also opened “another theatre of cooperation” on RQFII, she notes.
“In any event, the introduction of Hong Kong funds into the mainland will be in a gradual, orderly and measured manner,” Lam adds. “Of course, mainland funds that are available to Hong Kong investors will be subject to a similarly robust gate-keeping and supervisory regime.”
But offering a tantalising glimpse of a brighter future to Hong Kong fund managers in the room, she notes that, at $4 trillion, China saves more money than any other nation.
Efficient capital markets are the way to put the bulk of this bank-held money to work, she suggests. While mainland stock markets are still 80% retail, there is rising institutional investor participation – 17.4% in 2012, from 15.7% a year earlier.
“Mutual recognition could give impetus to this shift,” Lam says. “As recognised mainland funds attract overseas investors through the Hong Kong market, these funds could play a larger role as the mainland stock market’s institutional investors.”