Beijing likely to add curbs on cross-selling fund agreement

Beijing is likely to limit the amount of HK-based products to be sold on the mainland to protect its domestic industry from rising competition

PUBLISHED : Monday, 14 April, 2014, 5:07am
UPDATED : Monday, 14 April, 2014, 7:27am

Beijing is expected to restrict the amount of Hong Kong-domiciled funds it allows to be sold on the mainland as part of a mutual recognition agreement on cross-selling fund products.

The move was set to reduce the scale of the scheme substantially from what the industry players had been expecting, said two sources familiar with the negotiations.

One of the sources told the South China Morning Post that Beijing did not want to see its domestic funds come under competition from a flood of overseas funds and was looking to add a ratio restriction on the amount any Hong Kong-domiciled fund could sell across the border.

Beijing currently has capital controls that ban fund cross-selling between Hong Kong and the mainland. The Hong Kong government has been lobbying the mainland since last year for a mutual recognition scheme that would allow funds domiciled in the city to be sold across the border and vice versa.

The agreement is likely to be signed soon as part of Beijing's reforms to modernise its capital market. It may well be the next big change after the regulators on the mainland and in Hong Kong announced on Thursday a "through-train" scheme to allow investors on both sides of the border to cross-trade stocks listed in Hong Kong and Shanghai worth up to 550 billion yuan (HK$691 billion).

The authorities on both sides reached a consensus on the regulatory framework for the scheme in December. The source said the scheme was pending approval from the State Council.

The ratio, the source said, could be set as low as 10 per cent. This would mean a fund with an asset size of HK$100 million would only be allowed to sell about HK$10 million on the mainland.

Apart from limiting fund sales, this could also create operational problems in the event of fund redemptions.

"There are many technical details that need to be ironed out. This is why no agreement has been signed yet," the source said.

Another source said Beijing wanted this rider to ensure that only funds with sufficient liquidity were sold on the mainland. The central government would also want to make it mandatory for all Hong Kong-based funds sold on the mainland to appoint a master agent there to act as fund distributor, he added.

Funds domiciled in Hong Kong might also be required to be set up and operate for one or two years in the city first before being allowed to be sold across the border, he said.

Christopher Cheung Wah-fung, legislator for the financial services sector, said the restrictions were disappointing.

"Many had initially thought the scheme would allow a free flow of fund products across the border. The restrictions, however, are not a big surprise as Beijing usually likes to use quotas or other curbs to limit overseas firms' expansion on the mainland," he said.

"This will protect mainland fund houses. Such protectionism, however, prevents mainland fund houses from learning how to improve themselves to compete in the world. This goes against the grain of making the economy more market-driven."

Mark McCombe, Asia-Pacific chairman of BlackRock, said he had been expecting restrictions to be imposed by Beijing.

"We have to be realistic about Beijing wanting to ensure that sales of Hong Kong-based funds on the mainland are conducted in an orderly manner," McCombe said.

"Mutual recognition would not result in a flood of European or US equity funds into mainland China overnight. We take the long view that a cross-selling scheme would generally benefit the fund industry in Hong Kong."