The Hong Kong Securities and Futures Commission (SFC) announced1 on 23 January 2013 that it has been working closely with the China Securities Regulatory Commission (CSRC) to provide for the mutual recognition of retail funds authorized in Mainland China and Hong Kong. Whilst still at a preliminary stage, this initiative will make it easier for mutual fund managers to raise capital in Mainland China, and will encourage the further growth of Hong Kong as an international asset management centre and the pre-eminent offshore centre for the Chinese currency, the Renminbi (RMB).
In recent years, various joint initiatives in the asset management sector have been pursued by the Chinese and Hong Kong governments as part of the gradual process to internationalize the RMB. The Qualified Domestic Institutional Investor (QDII) program was launched in 2006, and the SFC was the first regulator to enter into memoranda of understanding with the CSRC and its bank and insurance regulatory counterparts, the CBRC and CIRC. This has allowed Chinese financial institutions to offer Hong Kong authorized funds on behalf of the promoters of such funds to Chinese QDIIs.
More recently, in December 2011 the Renminbi Qualified Foreign Institutional Investor (RQFII) program was launched, which allowed offshore RMB raised by Hong Kong subsidiaries of Chinese domestic fund management companies and securities companies to be invested directly in Mainland China’s domestic securities markets. Hong Kong authorized funds were the sole vehicle permitted to raise RMB under this initial phase of the program, and were permitted to invest directly in Mainland China’s A share and interbank bond market in RMB for the first time. The second phase of the RQFII program introduced in April 2012 has since allowed exchange traded funds which are established in Hong Kong and listed on the Hong Kong Stock Exchange to raise offshore RMB for investment directly into a portfolio of listed Chinese A shares. In less than a year, the RQFII program has led to the development of a new product class worth RMB56 billion.
At present however, there is no channel for funds authorized in Hong Kong to be sold directly to Chinese investors, or for funds in Mainland China to be sold directly to Hong Kong investors, hence the importance of this new initiative.
Proposal for mutual recognition
The proposed mutual recognition arrangements will allow funds authorized in either Hong Kong or Mainland China to obtain authorization in the other jurisdiction under a streamlined process, allowing such funds to be sold directly in the other jurisdiction for the first time.
It is currently unclear when this new framework will be finalized, but the SFC has confirmed that a joint working group was formed towards the end of last year. Given the rapid roll-out of other related initiatives in recent years there are reasons to be optimistic in this regard. The SFC has noted however that a full “passporting” regime allowing automatic entry into the other jurisdiction is still not an option in the near term, given the capital account restrictions in Mainland China and limits on RMB convertibility.
The most exciting aspect of this new proposal for fund managers outside of Mainland China will be the opportunity to raise capital directly from Mainland Chinese investors. Mainland China’s high savings rate, low investment fund market penetration and rapid economic growth all combine to make it a very attractive fundraising environment.
Hong Kong is also likely to become more popular as a jurisdiction in which to establish funds, given that a Hong Kong domicile is envisaged as a pre-condition for streamlined recognition in Mainland China. Whilst UCITS funds established in Europe currently constitute 70% of the funds authorized by the SFC in Hong Kong, such UCITS funds would not be entitled to benefit from streamlined recognition. This will assist Hong Kong in developing its domestic funds industry, allowing it to more effectively counter any competitive threat posed by the prospect of a funds passport being developed between Association of Southeast Asian Nations (ASEAN) members2.
The structural limitations of Hong Kong domiciled funds, which at present can only be established as unit trusts, are also likely to be given more attention in the near future. Hong Kong law does not currently permit the establishment of variable capital investment companies, meaning that it is not possible to establish corporate open-ended funds at present — although it is anticipated that the Companies Ordinance (Cap. 32) may be amended to address this.
At present, there are significant differences in the laws governing the distribution of funds in Hong Kong and Mainland China respectively, and the extent to which these laws will be harmonized and/or disapplied in order to implement an effective system of mutual recognition is unclear. Fund managers may also need to assess potential compliance risks and the structuring of their distribution arrangements in the foreign jurisdiction, particularly in light of the fact that more than two-thirds of funds sold in Mainland China are currently distributed through sales agencies (primarily commercial banks).
Looking to the future
As Hong Kong strives to cement its position as an international asset management centre and the pre-eminent offshore RMB centre, it appears that the Chinese authorities are continuing to be supportive in this aim. We are likely to continue to see further close cooperation between the Hong Kong and Chinese regulators in the future and the development of further initiatives that seek to capitalize on the relative strengths of each jurisdiction.
根据拟议安排，在中国大陆适用简化认可程序的一项前提条件是基金设立地在香港， 因此， 香港作为基金设立地可能会受到更多人追捧。目前，香港证监会在香港认可的基金中，有70%是欧盟可转让证券集合投资计划（“UCITS”）基金，但UCITS基金无权享受简化认可程序。这将有助于香港发展其本土基金产业，使之更能够有效地抵御由于东南亚国家联盟（“东盟”）成员国之间建立基金通行证所可能造成的竞争性威胁2。
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2 The Thai Securities and Exchange Commission announced on 27 June 2012 that it would allow ASEAN collective investment schemes to be offered to accredited investors by July 2012, with the goal of extending the initiative to retail investors in the later part of 2012. In addition, the Monetary Authority of Singapore circulated in April 2012 a proposal to develop a mutual recognition framework for retail collective investment schemes among ASEAN members.
This article was originally published by Bingham McCutchen LLP.