Last autumn, something happened in the cross-border industry that went almost completely unnoticed. In September, the Comisión Clasificadora deRiesgo (CCR), the Chilean regulator, approved China Asset Management’s CSI 300 Index ETF for distribution to Chilean pensions.1 The ETF became only the second Hong Kong domiciled fund approved by the CCR. However, it is quite possible that this seemingly innocuous event may end up being a major milestone in the cross-border fund industry. One that is both a key milestone in the development for China-Hong Kong Mutual Recognition funds and signals a turning point in Hong Kong’s status as a cross-border fund center.
The CCR’s approval signals that Hong Kong has become an approved cross-border fund domicile and may portend further distribution opportunities, beyond Asia. In recent years, one of the buzziest cross-border fund topics has been the long gestating China-Hong Kong Mutual Recognition program.
When launched, the program will create a passport for Hong Kong and mainland Chinese mutual funds allowing Hong Kong funds to be sold to Chinese investors and vice versa. It is widely believed that the program will include initial restrictions on the amount of money a Hong Kong fund can raise from mainland China because Beijing officials want to prevent Hong Kong funds from inundating the market and crowding out mainland funds and managers. To avoid this, it has been reported that a ratio governing how much money a Hong Kong fund can raise in China will be established.
Despite the swirling rumors surrounding the final ratio, let us assume the ratio is 1:1. In other words, for every dollar raised in China, a dollar must be raised from somewhere else. Given this requirement, the ability to broaden the non-Chinese investor base will be a critical component to success. For example, the ability for a Hong Kong fund to get inflows from a Chilean pension fund, which at last measure had $170 billion in assets2, is important because it adds to the overall non-Chinese investor base and, by extension, increases allowable flows from mainland China investors. This ratio will likely drive Hong Kong funds to seek additional markets of distribution, to further increase the potential flows from mainland China.
The possibility of accessing the Chinese market via a Hong Kong fund has captured the imagination of the industry, leading many to believe that Hong Kong will become a major regional fund domicile hub. However, as the development in Chile demonstrates, considering Hong Kong as a potential regional fund domicile hub may underestimate its longer-term potential to become a global cross-border fund domicile, akin to Ireland or Luxembourg.
It is easy to forget now, but both Ireland and Luxembourg were once viewed as only regional fund centers.
Should Hong Kong emerge as a global cross-border fund domicile, it would reshape the cross-border fund world and have serious implications for UCITS. To date, the conversation has centered on what the rise of Hong Kong means for the distribution of UCITS funds in Asia. However, not only would UCITS funds face increased competition from Hong Kong funds in Asia, UCITS funds would also face increased competition in other growth markets such as Latin America.
Hong Kong will not become a global cross-border center overnight. After all, it took Luxembourg and Ireland nearly 20 years to achieve that status. But timing is, indeed, a topic of discussion; as it becomes increasingly obvious that the shift is a matter of “when” not “if.”
Because history is written with the benefit of hindsight, many key turning points are seldom appreciated when they occur; instead their significance is only realized years later. When the history of Hong Kong’s rise to a global cross-border center is written, perhaps people will look back and identify the CCR approval as a key turning point.
1 Comunicado de Prensa Acuerdo Sobre Instrumentos de Oferta Publica, Comisión Clasificadora de Riesgo, 26 Septiembre 2014
2 Superintendencia de Pensiones, Valor y Rentabilidad de los Fondos de Pensiones, Diciembre 2014, page 2
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