Mutual Recognition of Funds (MRF), the Chinese liberalising measure designed to enable Hong Kong domiciled managers to sell to mainland retail and vice versa will likely be extended regionally and could find itself competing with UCITS and 40’ Act funds.
Experts have predicted that the potential extension of MRF could replicate previous liberalising measures such as the Qualified Foreign Institutional Investor (QFII) scheme which were gradually rolled out to third countries over several years. Some have acknowledged that UCITS and AIFM domiciles such as Luxembourg, Ireland and even Malta could eventually benefit from MRF.
Chris Powers, manager at Z-Ben Advisors, a Shanghai-based consultancy, is doubtful that these European onshore domiciles will reap the rewards from MRF. “MRF will likely become a regional fund platform which incorporates Taiwan and Singapore, for example. I am not sure it will be extended further afield. However, the Chinese retail market is sizeable and I believe MRF could become a regional fund platform and a successful passport scheme similar to UCITS and ’40 Act funds within about 10 to 15 years,” said Powers.
MRF scraps the requirement that Hong Kong domiciled managers enter into an equity partnership with a mainland financial institution. However, Hong Kong managers will still need to participate in distribution agreements if they are to realise any success of raising assets on the mainland. Some believe that China does not want UCITS competing with its domestic managers under MRF.
Authorisation of funds under MRF has been slow due to the market volatility in China. However, it appears that the Hong Kong Securities and Futures Commission (SFC) and China Securities Regulatory Commission (CSRC) have started approving more funds albeit slowly.
“While MRF does present opportunities for fund managers, we were always clear it would be a longer-term endeavour. As most funds distributed in Hong Kong are UCITS, they do not qualify under MRF and a number of fund managers are having to engage into a re-domiciliation process prior to opting for MRF. Of course, the global downturn in financial markets observed since the beginning of the year also diverted some of the managers’ attention too,” said Stephanie Marelle, head of BNP Paribas Securities Services in Hong Kong.
China’s retail market is sizeable and its middle class is growing. RBC Wealth Management and Capgemini both predict the high-net-worth-individual (HWNI) population in APAC will surpass that of North America in 2016. However, selling into China can be difficult. “The domestic Chinese retail market has an inherent bias to domestic fund managers and asset classes. It can be challenging for foreign fund managers to reach that audience,” said Powers.
One of the challenges in Asia-Pacific has been the proliferation of fund passport schemes over the last 18 months. The ASEAN Collective Investment Scheme (CIS), which launched in 2014, aims to create a fund passport by streamlining regulatory approvals for authorisation across Singapore, Malaysia and Thailand. Capital raising, however, has not been easy and limited assets have flowed into ASEAN CIS products.
The Asia Region Fund Passport (ARFP) covers Australia, New Zealand, Japan and South Korea. Some have said this scheme has greater momentum, particularly as it covers jurisdictions which have a history of fund investing. ARFP is likely to be launched later in 2016 or 2017. Both ASEAN CIS and ARFP do not include China. “It is a case of there being too many cooks in the kitchen in regards to fund passporting schemes in APAC. I believe MRF will usurp the ASEAN CIS and ARFP,” commented Powers.
China is liberalising its markets following the volatility earlier this year. China further liberalised foreign investor access to its interbank bond market (CIBM). Initially, only foreign sovereign wealth funds and central banks were permitted to transact on the CIBM but this has been extended to asset managers, commercial banks and securities firms.
“The opening of CIBM is a welcome development, fully in line with recent RMB internationalisation initiatives, and as such, not a complete surprise. We see it as the emergence of a new generation of schemes which we could describe as “Direct Market Access”, free of quota restrictions and with a
simple application process. As such, it represents a natural extension to the first pilot program of this kind, Hong Kong-Shanghai Stock Connect, which had already moved away from a quota allocated to a specific investor to a broader market level quota. The new CIBM regime goes a step further by opening up to a wide range of foreign investors and relaxing currency repatriation rules,” commented Marelle.
Stock Connect, the Hong Kong-Shanghai exchange linkage, is also proving popular. Foreign investors have welcomed the introduction of same day Delivery Versus Payment (DVP) for Chinese A Shares as it will help reduce counterparty risk, something which had prevented a number of mutual funds such as UCITS from gaining China exposure.
There is also mounting speculation Stock Connect will be extended to Shenzhen’s stock exchange. Shenzhen is home to smaller listed companies and Powers said the extension will probably occur in the third quarter of 2016. Others believe London could be a beneficiary although Powers was sceptical. “There are a lot of hurdles that would need to be overcome for an exchange linkage to be extended to London. The time-zone difference is probably the most fundamental. I do not envisage a London Stock Connect happening anytime soon,” said Powers.