7.5pc more Hong Kong funds ahead of mainland China cross-selling deal

Cross-selling agreement cited as key reason for increase in number of funds domiciled locally as international competitors experience decline

PUBLISHED : Monday, 10 February, 2014, 4:31am
UPDATED : Monday, 10 February, 2014, 8:49am

A much-anticipated cross-selling agreement between Hong Kong and the mainland has helped to increase the city's attraction as a domicile for international funds.

Data from the Securities and Futures Commission show the number of Hong Kong-domiciled funds has increased in past few months while those elsewhere have declined.

The number of Hong Kong-domiciled funds stood at 328 at the end of September, up 7.5 per cent from the end of March. In contrast, the number of Luxembourg-domiciled funds fell 7 per cent to 972 and Ireland-domiciled funds dropped 2.2 per cent to 271.

Stewart Aldcroft, Asia-Pacific chief executive of fund company CitiTrust, said the rising popularity of Hong Kong as a domicile destination for funds could be attributed to the much-anticipated mutual recognition agreement with the mainland.

SFC deputy chief executive Alexa Lam Cheung Cheuk-wah said last month the agreement, to be signed soon, would allow Hong Kong-domiciled funds to be sold on the mainland and mainland-domiciled funds to be sold here. Capital controls across the border currently bar such cross-selling.

"Hong Kong is on the right track in seeking to expand the fund industry but to do so, it has to seek access for locally domiciled products to be sold elsewhere," Aldcroft said. "This is why the mutual recognition agreement is important as the China market is significantly larger than any other in the Asian region excluding Japan."

Shay Lydon, a partner in the asset management and investment funds group at Matheson, the Irish law firm, said mutual recognition between Hong Kong and the mainland could be a threat to Ireland as it would mean that more fund managers planning to sell in the mainland would consider domiciling in Hong Kong.

"It depends on how long Hong Kong would enjoy the exclusive right to have the mutual recognition agreement," Lydon said.

"If a similar regime were to develop between the mainland and Western markets, then fund companies may prefer to domicile in Ireland where they may have existing fund ranges, together with the benefits of well established regulation, a choice of fund products and tax neutrality for the funds set up there."

Lydon said that when the mainland opened up more its capital market, it would offer more opportunities for Irish professional companies and global fund managers using Ireland as a fund domicile because he believed some mainland funds would be allowed to be sold in Europe in the future.

Since the Hong Kong government announced plans for the mutual recognition agreement last year, many fund houses, including BlackRock, Schroders and Principal, have decided to launch more locally domiciled funds.

Eleanor Wan Yuen-yung, the chief executive of BEA Union Investment, said her company had 12 Hong Kong-domiciled funds and planned new local issues this year.

"Mutual recognition will definitely provide a good reason for fund companies to set up their products here," she said. "Hong Kong-domiciled funds were earlier not allowed to sell in Europe or the US but only in Hong Kong, with a population of just seven million. Now that they can be sold to China, it makes the market that much bigger."

While Wan said the new agreement would attract overseas funds to set up here, she cautioned that it would still be difficult to compete with the likes of Luxembourg or Ireland.

"Many of these markets have tax benefits and other arrangements to attract fund companies," she said. In addition, funds set up there under a UCITS (Undertakings for the Collective Investment In Transferable Securities) structure can be sold across Europe and other markets."

Aldcroft agreed that Dublin and Luxembourg had become popular locations for fund domicile because of the reach of UCITS. "The worldwide acceptance of a high standard of regulatory control and zero tax on funds are a big draw," he said.

Hong Kong would be in trouble if Beijing extended the mutual recognition deal to other fund-domicile locations such as Luxembourg, Dublin, London and the Cayman Islands. "That would erode Hong Kong's attractiveness," Aldcroft said.

Lam has said that Beijing had confirmed the mutual recognition would be exclusive to Hong Kong initially but there is no word on how long it would enjoy that status.