Beijing is key to city's fund success
Proposed changes will help boost the industry in Hong Kong, experts say, but a mutual recognition deal on cross-border selling is essential
Proposals designed to make Hong Kong a "world fund factory" have won industry backing, but fund managers say that persuading Beijing to allow local funds to be sold to mainland investors remains the key.
Financial Secretary John Tsang Chun-wah said in his budget speech in February that the government would propose law changes to extend profit tax exemptions to offshore private equity funds. He also wants to allow Hong Kong funds to set up as open-ended investment firms instead of trusts, as required under existing rules.
In addition, Tsang said the government was in talks with mainland authorities on a mutual recognition agreement for the cross-border selling of funds - meaning Hong Kong-domiciled funds could be sold on the mainland and mainland funds could be sold in Hong Kong. China still has capital control, so overseas funds cannot be sold in the mainland and vice versa.
Mark McCombe, the Asia-Pacific chairman of US-based fund house BlackRock, said the proposals would help boost Hong Kong's fund industry.
"The contemplated steps proposed in this year's budget are definitely a step in the right direction, and we do welcome the proposed changes," McCombe said.
However, he said he believed that further changes were necessary before Hong Kong could become a prominent international fund centre.
"One measure would be for the government to continue to cut down tax friction," McCombe said. "Globally, we see other countries now discussing and imposing more onerous taxes and the Hong Kong industry may stand to directly benefit from these changes. By continuing to further cut down tax friction, this will really drive funds management industry behaviour towards Hong Kong."
Mark Konyn, the chief executive of Cathay Conning Asset Management, said funds domiciled in Hong Kong might not attract retail investors. "The big driver for Hong Kong domiciled funds growth is likely to be the prospect of these funds having a broader distribution opportunity that includes mainland China."
As such, he said the proposed mutual recognition would be important.
"It is far too early to assess what type of funds will be permitted under such a recognition platform. One of the concerns that fund managers have voiced is that a condition may apply that requires funds to have a minimum track record to qualify.
"This would suggest that managers need to start incubating such funds ahead of formal implementation and could result in more costly funds," Konyn said.
He said another driver for the Hong Kong fund industry would depend on whether the European Union would go ahead with a proposal to impose remuneration restrictions on fund managers managing European-based funds. "In which case, fund managers would have a good reason to shift their domicile to Hong Kong," Konyn said.
Eleanor Wan Yuen-yung, the chief executive of BEA Union Investment Management, said the government reform plans would help to attract more funds to set up locally. Out of about 1,850 authorised in Hong Kong, only about 300 are domiciled in Hong Kong with the rest in Europe.
"BEA Union already has funds domiciled in Hong Kong for distribution to the public," she said. "It is our continued commitment to build our business in Hong Kong."
Wan said if Hong Kong funds could be sold in China, the equities funds and fixed income funds covering Asia and emerging markets would be popular with mainland investors.
Elvin Yu, the head of institutional business, China and Southeast Asia, for Allianz Global Investors, said the Hong Kong domicile fund status could open up a huge market for offshore managers.
However, if China only accepted overseas domiciled funds authorised by the Securities and Futures Commission to be sold on the mainland, then it would be less attractive for fund houses to base funds in Hong Kong.
Hong Kong Investment Funds Association chief executive Sally Wong said the reforms would create more job opportunities, especially for trustees, lawyers and accountants.
"If the mainland/Hong Kong mutual recognition concept comes to fruition, this means a manager will no longer just be looking at an investor base of a few million, but one that is multiples of that," Wong said. "Ultimately, the mainland market is the growth driver in the future for the Hong Kong fund industry, and to attract more international players to set up offices here."