As Hong Kong money managers cheer the new mutual fund recognition scheme that will allow them to raise as much as 300 billion yuan in the onshore market, selling their funds on the mainland is unlikely to be a smooth process. Domestic banks own the widest fund distribution network in China, but doubts about the speed, quality and reliability of that channel could seriously impede foreign money managers’ fundraising in the country, according to a report by the Shanghai-based research firm Z-Ben Advisors. Hong Kong money managers are likely to raise 100 billion yuan from mainland investors by the year-end via the scheme, much less than mainland firms which are expected to raise 200 billion yuan or more from Hong Kong, it estimates. “The mainland FMCs (fund management companies) will have a much easier time dealing with Hong Kong distribution than Hong Kong firms will on the mainland,” the report said. According to the China Securities Regulatory Commission, around 100 Hong Kong funds and 850 mainland funds will be eligible to participate in the mutual fund recognition programme, which allows the funds on each side to sell up to 300 billion yuan of fund products in each other’s market, respectively. The long-anticipated programme will require a fund to be domiciled in Hong Kong. General equity, fixed income, physical-only exchange traded funds and unlisted index funds will qualify for distribution. The core challenge will be how foreign funds connect with end customers. Only a small portion of funds will be distributed through the branches set up by foreign banks in China. The majority of fund products will need to pay high commissions for shelf space with domestic banks, many of which have their own in-house fund ranges to sell. Cultivating solid relationships against a backdrop of competing interests is not easy – especially for firms trying to get to understand the demands of customers they are being kept at arm’s length from. “Mutual fund recognition’s devils, if any, will be in the details of how money moves from customer to fund and those, for the moment, are thin on the ground,” Z-Ben said. Brand alone may not be the determining factor of success in the looming battle to secure the capital of mainland clients. The experience of firms that have made inroads on QDII (Qualified Domestic Intuitional Investor) products have only done so because they have successfully navigated the difficulties of domestic banks’ sales networks. “The trifecta of JV (joint venture) experience, QFII (Qualified Foreign Institutional Investor) and RQFII experience (teaching how to work with local banks as transfer agents and custodians) and QDII selling experience (teaching the distribution strengths and weaknesses of potential partners) appears to us to define mutual fund recognition’s early northbound winners,” it said. Asset management firms with joint venture partners and those with extensive on-the-ground infrastructure such as Invesco, BEA Union and JPMorgan Asset Management are the likely short-term northbound winners, Z-Ben concluded.