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SCMP Reporter

State Street Global Advisors, the asset management company running the Tracker Fund of Hong Kong, has been in intensive talks with mainland officials who aim to set up a similar product.

The mainland sees a tracker fund solving a variety of its huge financial problems.

The fund would help the government reduce its stakes in state-owned enterprises, promote corporate reform and provide cash to meet massive unfunded state pension liabilities.

'In China, the top level has been decided. It is just the middle that needs to understand it and push it through the system,' said Vincent Duhamel, the chief executive of State Street's Hong Kong unit.

'There are some people who get very excited about it and say 'This is the whole solution'.'

Before leaving yesterday for talks in Beijing, State Street's director of investments Justin Pascoe said: 'I think it will happen. It is just a case of when.'

Even the premier had become interested in the idea after learning of it from Anthony Neoh, the chief adviser to the China Securities Regulatory Commission, Mr Duhamel said.

'They have come [for talks]. A lot of questions have been asked,' he said. 'Anthony Neoh raised a memo that went, according to our sources, all the way to [Premier] Zhu Rongji.

'Then Zhu Rongji probably woke up one morning and said I want to [act] on this and everybody started running around to try to find a solution for this instrument.'

There were considerable barriers standing in the way of a mainland exchange-traded tracker fund, State Street said.

These included clarifying ownership of shares among the many tiers of government, setting up the legal infrastructure, creating a benchmark index, and establishing a clearing system to buy and redeem units.

'There's a lot plumbing that goes behind that needs to be put in place,' Mr Duhamel said. 'That's our job to explain that. It is much more complicated than it seems on the surface. They get it absolutely.

'You do have a sense that there is a strong willingness to try to find solutions to the difficulties.'

The moves towards setting up a tracker fund are another indication that Beijing is serious about pushing through capital market reforms, which may include the unification of the Shanghai and Shenzhen stock markets and the opening up of A shares to overseas players through a qualified foreign institutional investor scheme.

State Street took three years to obtain permission from United States regulators for Spiders, the world's first exchange traded fund (ETF) which began trading in 1993.

The mainland would not be a quick process either, Mr Duhamel said.

'An ETF won't come out in [the mainland] in the next month,' he said. 'Based on the experience in Hong Kong, I don't see how it can be done in less than two years.'

One of the biggest hurdles to setting up a mainland tracker fund is the poor corporate governance among state-owned companies.

State Street and other companies running tracker funds still had fiduciary duties to fight for the rights of their unit holders, Mr Duhamel said.

Corporate governance was a hot issue in the US and if clients read reports that State Street was not doing its duty to shareholders.

'Guess what, we would go from US$738 billion to $200 billion [assets under management] in about three days,' Mr Duhamel said.

'If we get a case where there is stealing from the shareholders in Hong Kong in the Tracker Fund, we will get in there.'

First Tracker Fund officials would have quiet words with errant chiefs of Hang Seng Index companies. If that did not work, then they would 'make all the noise we can'.

'We will always argue that if we go public with those things, you are going to have 150,000 people in Hong Kong who are going to be very angry at your company,' Mr Duhamel said.

So what happened when chairman Li Ka-shing sold a stake in a Singapore property project to Cheung Kong (Holdings) for HK$1.48 billion?

'On that specific one, no we did not tap Li Ka-shing on the shoulder,' Mr Duhamel said. 'To give the benefit of the doubt, Li Ka-shing has not typically been that bad for shareholders.'

The Tracker Fund came under fire for dumping Hang Seng Index constituent Cable & Wireless HKT shares on the market on the final day of trading before its merger with Pacific Century CyberWorks.

However, Mr Duhamel said the Tracker Fund had not left the sale of its HKT stake until the last minute.

'We were out of their way before this whole thing,' he said.

'I think the problem that happened there was that a lot of people expected us to do something and were positioned accordingly, and we just didn't show up.'



Beijing mulls over tracker fund solution to financial problems