In its unique role as the offshore centre for capital flows of Renminbi (“RMB”) outside the Mainland, one major trend in the last 12 months for the Hong Kong funds industry has been a significant increase in the number of PRC asset management companies coming to Hong Kong to set up their fund platforms in this global fund market and the increasing emergence of RMB products, including RMB funds.
PRC asset management companies to go global
The promulgation of the Provisions on Establishment of Operations by Fund Management Companies in Hong Kong by the China Securities Regulatory Commission (“CSRC”) in May 2008 signals a significant regulatory change of the PRC government policy to encourage PRC asset management companies to use Hong Kong as the gateway to tap into the global investor market.
How do the PRC asset management companies access the Hong Kong market?
Most of the PRC asset managers started their businesses in Hong Kong through wholly owned subsidiaries holding Type 4 (Advising on Securities) and Type 9 (Asset Management) licences from the Securities and Futures Commission (“SFC”). At the early stage of building up their business platforms in this market, the main function and business model of these subsidiaries are confined to a more limited role of providing advisory support to their Mainland parent companies, such as:
- providing investment advisory service for the Qualified Domestic Institutional Investors (“QDII”) funds managed by their parent companies and/or other QDII entities; and
- providing discretionary account management for institutional clients with a close tie to the Mainland.
With the further liberalisation of RMB in the last 12 months as commented in our recent client alert Renminbi services and products in Hong Kong - opportunities and challenges and Renminbi’s growing role in global trade and finance, these PRC asset management companies are well placed to take advantage of their ability to access PRC assets and investment opportunities for inbound and outbound capital flows into and outside the PRC. The Hong Kong subsidiaries of PRC asset management companies have traditionally played a key function in promoting their Mainland parents’ research and investment expertise in the A-share market. The anticipated launch of the new “Mini-QFII” pilot scheme proposed by the PRC regulators in July 2010 signals another significant move by the PRC government to further opening up the PRC markets to offshore investors.
Mini-QFII is a new quota system proposed by the PRC regulators last year as a trial program to allow Hong Kong subsidiaries of PRC asset management companies and securities firms to invest their offshore RMB funds in the PRC capital market. There is speculation that the regulators will approve an aggregate quota of up to RMB20 billion to 10 Hong Kong subsidiaries of PRC asset management companies and securities firms in the first batch of the Mini-QFII pilot scheme approvals.
It is also anticipated that the Mini-QFII entities will be requested to invest not less than 80% of their offshore RMB funds in domestic bond market during the initial stage after the pilot scheme being launched. An exciting aspect of the Mini-QFII scheme for market participants is the opportunity for the Mini-QFII entities to use their offshore RMB to access the Mainland Inter-bank Bond Market in the near future - this is a key fundamental advantage of the new Mini-QFII scheme over the long established QFII scheme. A brief comparison table of the QFII scheme against the Mini-QFII scheme is attached here.
As at the date of this publication, the regulators have not yet released the rules and quota for the Mini-QFII scheme. However, a draft of the implementation rules for the Mini-QFII scheme is reported to have been circulated by the CSRC for soft market consultation, with speculation that the official version will be released very soon in 2011. These CSRC implementation rules will lay down further details on the criteria for eligible Mini-QFII applicants and operational issues, such as the remittance period, lock-up period, selection of qualified brokers and custodians in the Mainland to service the Mini-QFII regime.
It is reported that an increasing number of PRC asset management companies plan to set up an operation in Hong Kong to take advantage of the new Mini-QFII regime in launching RMB denominated funds to access the Mainland market. The first RMB fund was rolled out in Hong Kong to retail investors by the Haitong asset management group in August 2010, followed with more retail RMB funds coming to the retail market. On the private fund side, the increasing demand for enhanced yield generated by the Mainland assets has set a popular trend for private funds offering inbound investment into the Mainland assets. We expect to see many more RMB denominated products to be launched in the Hong Kong market this year. There is no doubt that this will further boost the unique position of Hong Kong as the offshore RMB centre in the internationalisation path of RMB.
Challenges to go global
Before commencing business in Hong Kong, these overseas subsidiaries of the PRC asset managements must first obtain approval from the CSRC in the Mainland as well as the SFC licences for conducting regulated activities in Hong Kong. The approval process from the Mainland and the Hong Kong sides are relatively straightforward. Not dissimilar from other new business start-ups, a common threshold issue for these start-ups of the Mainland asset management groups in setting up an operation in the Hong Kong fund market is the need for qualified key personnel in their management team (including at least two responsible officers) who hold the requisite licences/qualifications for the relevant regulated activities that the fund house intends to be engaged in.
Other challenges faced by new operations of the PRC asset management groups include:
- Short fund management history in the Mainland: Fund industry in the Mainland has a relatively short history with the major developments being advanced in the last 10-15 years only. Most of the expertise of the PRC asset management groups are confined to simple mutual fund structure with investments in the Mainland equity market.
- Limited resources and restricted client base: Many of these subsidiaries start with a small business team, with very limited resources. As a new comer to the market, these subsidiaries need to build up their reputation and distribution channel to compete with their international competitors who have a proven track record of operating in this market. Most of these subsidiaries tend to focus on Mainland institutional investors at the initial stage of their business operation leveraging off their ability to access the QDII schemes and the PRC investment opportunities through their Mainland connections.
- Gap between the regulatory frameworks in the PRC and Hong Kong: There remains a significant gap between the regulatory framework and product diversification between the fund markets in the PRC and Hong Kong. These subsidiaries are in a deep slope to catch up with the global fund market players in this market.
Other trends in the Hong Kong fund industry
Another trend that has emerged in the Asian funds market, particularly Hong Kong and China, is an increasing interest and demand for exchange traded funds (“ETFs”). As the second largest ETF market in Asia, Hong Kong’s ETF platform has steadily continued to grow over recent years, and now includes a variety of ETFs, ranging from traditional physical ETFs to synthetic ETFs and commodity ETFs. The SFC has continued to support the growth of Hong Kong’s ETF platform, having entered into a memorandum of understanding with the Taiwan regulator to facilitate the cross-listing of ETFs between Hong Kong and Taiwan, and has a streamlined recognition process for authorising overseas ETFs cross-listed from certain acceptable overseas stock exchanges. It is anticipated that the next imminent development in the ETF market will be the cross-listing of ETFs between Hong Kong and China.
With the increasing investor appetite for investments in the PRC capital markets, PRC asset managers will continue to assert their influence in the inbound and outbound capital flow between Mainland and the rest of the world, with Hong Kong playing the key gatekeeper role. We expect the anticipated launch of the Mini-QFII scheme will further foster the role of PRC asset management companies in the Hong Kong fund market and the development of RMB denominated products in this offshore RMB centre.