A Sino-British pact on cross-border fund sales? Not so fast
As China opened up its economy to the world, Hong Kong has long enjoyed the exclusive right to develop certain new products and services.
Now there are straws in the wind that the mainland may not only sign a mutual recognition agreement with Hong Kong to allow the selling of fund products in each other’s markets but may soon also sign a similar accord with Britain.
Still, it appears many fund managers in the city do not think that will happen. They believe Hong Kong, as in the past, will be the first jurisdiction for some time to test such a scheme.
Capital controls have prevented international funds from being sold on the mainland and mainland funds from being sold in the city. That may change soon.
In December, regulators in Hong Kong and on the mainland said they were in the final stages of preparing an agreement to allow cross-border sales.
Shortly afterwards, some market players in the West said Britain might soon also sign such an agreement with China and thus undermine Hong Kong’s first-mover advantage.
Managers at many local fund houses, however, told White Collar they were not too worried about that prospect. Many are busy preparing to launch new funds in Hong Kong this year with a view to selling them on the mainland as well.
Their confidence rests on several grounds.
First, Beijing has always used Hong Kong as a testing ground in such matters. Twenty years ago, it allowed the city to launch H-shares, through which state-owned enterprises could raise funds from abroad.
While some mainland firms are listed in London or New York, the volume of trading is nothing compared with that in Hong Kong, which now has more than 700 mainland-related firms listed, representing 57 per cent of the market capitalisation of companies on the stock exchange.
In 2003, Beijing also chose Hong Kong to be the only offshore centre for yuan business. It held that privilege until 2012, when London, Singapore and Tokyo were added to the list.
Fund managers believe Beijing will not sign a mutual recognition agreement for fund sales with Britain any time soon.
Many mainland fund houses have sold funds under the renminbi qualified foreign institutional investor scheme – which started in 2011 and grants selected firms operating yuan-denominated funds in Hong Kong a quota to make investments on the mainland – so they are already familiar with the Hong Kong market.
Also, many financial employees in the city share a language and culture with the mainland fund managers. It would take some time for these mainland funds to be ready to be sold in Britain.
In addition, Hong Kong regulators have spent more than a year negotiating an agreement with their mainland counterparts. Negotiations with British regulators may only be in the early stages, if they have even begun.
Alexa Lam, deputy chief executive of the Securities and Futures Commission, reiterated last week that regulators in Hong Kong and on the mainland are ready to sign the agreement.
A game change is looming.