WHITE COLLAR
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Hong Kong needs longer exclusive status in fund sales programme

PUBLISHED : Monday, 01 June, 2015, 9:54am
UPDATED : Monday, 01 June, 2015, 1:22pm

Hong Kong needs to have exclusive status for the soon-to-be launch cross border fund programme with the mainland or it will fail in its goal to become a centre for the world fund industry in this part of the world.

Hong Kong usually has the first mover advantage for any Chinese market reform plans. But exclusive status for the city has never been the case.

The city was granted selective yuan banking business from 2003 but then other markets were given the business after a relaxation in rules from 2009.

Beijing granted the first yuan-denominated qualified foreign institutional investors (RQFII) quota to Hong Kong in December 2011, allowing the city’s financial firms to introduce offshore yuan fund investing in mainland stocks and bonds. Since 2013, Beijing has granted an RQFII quota to London, Singapore, Paris and Luxembourg.

The stock market through train scheme between Hong Kong and Shanghai from November has remained exclusive to the city and this would later be expanded to the Shenzhen stock market this year. But there are already talks for Shanghai to link up with other markets in Taiwan or even in Europe.

Last Tuesday, Deutsche Boerse said it had agreed to set up a joint venture with the Shanghai Stock Exchange and the China Financial Futures Exchange to develop Chinese shares and exchange-traded funds. The format of the tie up between Deutsche Boerse and Shanghai Stock Exchange is an offshore market co-operation deal.

This shows Hong Kong is not alone in setting up linkages with China and many overseas exchanges want a slice of the pie. It is not far fetched if Shanghai or Shenzhen stock exchanges tie up with other markets in the future.

Sooner or later, Hong Kong will lose exclusive status for any mainland reform plan. The newest one on the block is the mutual fund recognition scheme signed last month which will allow cross border fund sales with a 600 billion yuan quota from July 1.

Hong Kong can benefit a lot from this scheme due to a condition for international fund houses being sold on the mainland to be domiciled in Hong Kong for a year and have their fund managers regulated by the city’s Securities and Futures Commission.

This has changed the landscape of Hong Kong fund markets because the majority of the funds sold here are domiciled in Luxemburg or Dublin and can be sold in Europe, Latin America and many Asian countries. Hong Kong’s population of 7 million people is simply too small for these fund houses.

Since the Hong Kong government unveiled the plan in 2013 mutual fund recognition, it has led to more international fund houses setting up here to cater to China’s 1.3 billion people. The number of Hong Kong domiciled funds climbed to 570, double the 300 registered five years ago.

If Hong Kong can keep the exclusive status on fund business for a longer period of time, it would attract more fund houses to set up an office in the city. Hong Kong could then expand from a fund sales centre to become a fund manufacturing centre for the region.

Imagine if Beijing would sign up similar cross border fund sales agreements with Dublin and Luxembourg, then the international fund houses would simply think it is not necessary for them to open offices here. They can simply set up in Dublin or Luxembourg to sell funds on the mainland. The government and fund professionals of Dublin and Luxembourg have been doing a lot of lobbying on this in the past year.

This is why Secretary for Financial Services and the Treasury Chan Ka-keung has to ask Beijing to let Hong Kong continue to be the only financial market worldwide to have such a mutual recognition agreement as it would be a big boost for the city’s asset management industry.