Summer 2013

DISTRIBUTION: The Taiwan connection

F1 carTalks about mutual fund recognition between Hong Kong and China – a ‘highway’ for distributors – are advancing. Stefanie Eschenbacher finds this has raised hopes in Taiwan that it will also be included. Taiwan’s authorities have asked its asset managers to provide their thoughts on the mutual fund recognition scheme with Hong Kong. Henry Lin, president of Fubon Asset Management, and chairman of the Securities Investment Trust & Consulting Association (Sitca), was one of those consulted. “We, as local asset managers, have been asked for our opinion by the Taiwan authorities,” Lin says. “We did provide our opinions and suggestions.” While the Securities and Futures Commission (SFC) of Hong Kong and the China Securities Regulatory Commission (CSRC) have made no secret of their plans to move towards mutual fund recognition – quite the opposite – it has only just emerged that the SFC may also be in talks with the Financial Supervisory Commission of Taiwan. EXPERIMENT BOLDLY
Mutual fund recognition can make creating funds, authorising and selling them into other jurisdictions smoother. This would make the process for asset managers and fund distributors easier, saving cost and time. Hong Kong and China have more agreements to facilitate cross-border flows than China has with any other jurisdiction. But capital account restrictions are still in place: cross-selling of funds between China and Hong Kong is off limits. Alexa Lam, deputy chief executive officer at the SFC, says it is now time to “experiment boldly” on the back of the success it had with the renminbi qualified foreign institutional investor programme. But Lam has made it clear that there are no plans for a fund passport in the near term. With a fund passport, a fund that has been authorised in one jurisdiction could then be sold into any other that recongises the passport. “We cannot be overly ambitious,” Lam says. “At a time when the mainland still maintains capital account restrictions, and when the renminbi is not fully convertible, we must first start with a mutual fund recognition programme.” Lam says recognised funds will have the privilege of getting on the “highway” that leads to other markets, but they still need to go through a “checkpoint” at the border. There is no channel for funds authorised in Hong Kong to be sold directly to investors in China; investors outside China cannot invest in funds authorised in China. The proposed mutual fund recognition, Lam says, would “open the gate to this mutual traffic flow, for the first time”. Other than the proposed mutual fund recognition between Hong Kong and China, and possibly Taiwan, there have been other initiatives to establish Asian passports that would rival Europe’s Ucits. “We do not know the actual topic of the talks between Hong Kong and Taiwan, or what the progress is,” Lin says, adding that hopes are rising that Taiwan will be included. Lin says he would prefer to be part of the mutual fund recognition scheme involving Hong Kong and China, than to be included in the pan-Asian passport. “If we can join the Asian passport that is being pushed by Australia, that would benefit Taiwanese asset managers because they could promote their funds across Asia.” But Lin reiterates that a Greater China passport, or mutual fund recognition between Taiwan, China and Hong Kong, would be the most desired outcome. The region, he adds, is “a hot spot for mutual funds in Asia”. Stewart Aldcroft, senior advisor, Asian fund management industry, at Citi, predicts mutual fund recognition between Hong Kong and China to happen in the fourth quarter of this year. “There have been discussions, but there is no indication how long this will take.” So far, the discussions are driven by the SFC in Hong Kong. “Hong Kong initiated it so Taiwan cannot expect to be part of it unless Hong Kong agrees.” But Aldcroft highlights that “Taiwan is desperate to be in there from day one”. SINGAPORE
Darren Bowdern is a tax partner at KPMG, which provides audit, advisory and tax services. Bowdern, whose area of expertise is funds, says the focus of regulators  is to facilitate cross-border fund distribution between Hong Kong and China. He says there are no indications that suggest Taiwan or any other jurisdiction would be included in the scheme. “We do not believe that will include Taiwan or Singapore at this stage,” he says. “There are still a lot of decision that need to be considered by regulators before they release details.” If another jurisdiction were to be included in the mutual fund recognition scheme, he says, Singapore would be a more likely candidate than Taiwan. “Hypothetically, I would have to say Singapore, given the closeness and the competition between Hong Kong and Singapore.” Bowdern says it is difficult to single out one reason why Taiwan would not be included, but adds that there are a number of issues on tax and the market in general. He says it may be a couple of years until mutual fund recognition between Hong Kong and China is finalised and there are still many ambiguities.  “It is not entirely clear if foreign asset managers with an office in Hong Kong would qualify.”   Mutual fund recognition does not mean asset managers will be able to distribute and market every Hong Kong product into China – they will still have to get their funds approved by the CSRC. “Hopefully, they will reach an agreement as soon as possible because it will be a boost for the market, especially given the renminbi reserves around,” he says. Hong Kong has already mutual recognition with Taiwan for exchange-traded funds. Offshore funds can relatively easily be distributed in Taiwan through Taiwanese banks. According to figures for the Taiwanese offshore fund market from Sitca, funds domiciled in Luxembourg and Ireland make up 90% of the market. Local mutual funds, however, cannot be sold into Hong Kong or, in fact, any other country in Asia. Lin says Taiwanese asset managers have a competitive edge when it comes to Greater China investment strategies. However, he concedes that they would not be able to compete with established, international players when it comes to investing in Europe and the US. UCITS RIVAL
“There is a lot of interest in Taiwan from investors and we are also working for Chinese investors,” Lin says, adding that this demand is likely to increase further as China matures, offering more investment opportunities. In November last year, Fubon Asset Management and BOCHK Asset Management signed a memorandum of understanding for an exclusive co-operation in investment advisory and business development in the Taiwan region. A Chinese bond fund, the Fubon China Bond Umbrella Fund, is scheduled to launch in June. It will be denominated in renminbi. “There are a lot of renminbi assets in Taiwan and a lot of investors are looking to invest in them,” Lin says. “Providing renminbi investment vehicles is part of our strategy.” Damien Barry, senior vice president at State Street, and responsible for offshore fund services in Asia, predicts Ucits retain its importance in Asia. “Hong Kong, Singapore and Taiwan are the recipients of manufactured Ucits from outside,” he says. In China, there is access to Ucits through the qualified domestic institutional investor programme.  Barry says the fact that markets are opening up towards Ucits is an important development, strengthening the brand further. He says Hong Kong and China will have to determine whether Ucits will be included in their mutual fund recognition scheme, given that many Hong Kong-based Chinese asset managers are now launching Ucits funds in Luxembourg and Ireland. “The use of Ucits funds by Chinese asset managers is increasing as they are trying to grow their brand outside China,” he adds. While some Chinese asset managers have had tremendous success in their home markets, raising large sums of money for a single product in a short time, they have struggled to establish themselves in Europe. GLOBAL BRAND?
Barry says some of them have recognised that Ucits is a vehicle to build a brand outside Asia.    Europe prides itself with the fact that Ucits funds can be sold more than 70 different countries. It is supposedly a global brand, but some of the world’s largest mutual fund markets remain closed to them. Ucits funds cannot be sold into the world’s largest mutual fund market, the US, nor sold in Latin America’s largest market, Brazil, or that of the Middle East, Saudi Arabia. Asia is the second largest market for Ucits funds outside Europe, but they cannot be sold in the largest markets in the region, China and India. ©2013 funds europe

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