SFC urges Hong Kong to pursue China fund links

SFC executive director Alexa Lam says it is not enough for Hong Kong to be a beneficiary of fund outflows from China; it should welcome Mainland managers and provide support services.
Being a mature asset management market, Hong KongÆs next stage of growth will come largely from China and the Hong Kong should play a wider and more proactive role in working with the Mainland, says Alexa Lam, executive director of intermediaries and investment products at Hong HongÆs Securities and Futures Commission (SFC).

Hong Kong has benefited from ChinaÆs implementation of the qualified domestic institutional investor (QDII) scheme, both in terms of actual inflows from the Mainland and in terms of a major boost in sentiment. ChinaÆs State Administration of Foreign Exchange has granted a total of $52.7 billion in QDII quotas. Of that total, $16.6 billion went to 21 Mainland commercial banks, $29.5 billion to six fund management companies and one securities firm, plus $6.6 billion to 14 insurance companies.

Many, if not most, of the retail QDII products launched so far have a significant component that invests in the Hong Kong equities market or stocks of Chinese companies listed in Hong Kong.

ôWhile Hong Kong has enjoyed the first influx of QDII fund flows into our market and will probably continue to do so, one must recognise that capital from the Mainland, given its size and the natural need for diversification, will look for a broad spectrum of investment opportunities, both in geographical exposure and product range,ö says Lam, who spoke at a seminar organised by the Hong Kong Securities Institute.

ôThe objective of the QDII scheme is not just for channelling excess capital overseas. It is the first major step for Mainland intermediaries and investors to gain exposure and experience and ultimately to master world class investment techniques, expertise and standards, which could then be used at home to deepen and broaden their capital market and product pool,ö she adds.

As of July 2007, assets under management in China totalled $400 billion, about half the assets in Hong Kong as of end-2006. This highlights both the scope for growth, and the urgency for the MainlandÆs asset management industry to quickly build critical mass of skill and expertise in the discipline of capital markets, international finance and asset management, Lam says.

ôI believe this is where Hong Kong could give value and play a meaningful role, a role that one would argue is naturally Hong KongÆs,ö Lam says.

Under the Closer Economic Partnership Agreements arrangements, China's fund managers can come to Hong Kong to establish subsidiaries to engage in asset management business.

ôIn my view, we should welcome mainland managers here, not just to play a role in managing and supporting their QDII products, but also to use Hong Kong as a platform to gain familiarity with internationally-renowned standards, up-to-date investment practices and best regulatory and compliance requirements,ö Lam says.

ôWe should encourage them to build connections with overseas industry practitioners, gain real-time access to global information, and learn to master investment techniques. This will ensure that they become integral and long term players in our market and that eventually they could, just like any of the asset managers licensed here, manage SFC-authorised funds and accept investment mandates from overseas investors,ö she adds.

In return, the mainland fund managers could bring in investors and assets from China to Hong Kong, Lam says. They could also provide industry players in Hong Kong with hands-on experience in dealing with mainland investment rules and regulations, as well as serving the investment needs of their clients.

ôSuch knowledge is fundamental to Hong KongÆs success in playing a meaningful role in the development of investment management business in the mainland. For Hong Kong to be truly global and competitive in the new economic order, we need to build a critical mass of mainland financial intermediaries and players here,ö she adds.

The challenge for Hong KongÆs asset management industry is to continue to grow this business in face of stiff competition, Lam says, noting that liquidity is mobile at the touch of a button.

ôWe have been dealt a strong hand because the mainland is opening up in search of investment channels and expertise. We should play this hand to the mutual benefit of the mainland and Hong Kong,ö Lam says.
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