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The force is strong with Hong Kong

Hong Kong looks to leverage the Mainland, with support from the fund management industry

With the introduction of a new open-ended fund company (OFC) structure later this year, Hong Kong hopes to further boost its claim as a global cross-border funds hub. Authorities hope the new structure will help lure funds away from competing markets like Luxembourg and the United Kingdom, while stimulating cross-border trade with Mainland China under the Mutual Recognition of Funds (MRF) program.

Rebuilding the bridge to China 

Key insights

  • Hong Kong's OFC regime is expected to boost its appeal as a domicile for asset managers keen to have close proximity to Mainland Chinese investment
  • Hong Kong aims to become a global asset management hub and attract funds away from competing jurisdictions in Europe
  • Hong Kong's privileged access to China is an important feature for fund Managers

Hong Kong, which handles approximately 70 percent of global RMB payment transactions and is the world's largest offshore RMB business centre, is looking to return to prominence as the primary intermediary for Chinese foreign investment and trade.1 The OFC regime is a key plank of the territory's strategy of “leveraging the Mainland while engaging the world," as described by Hong Kong Monetary Authority CEO Norman Chan.2 In particular, Hong Kong is determined to play a pivotal role in China's USD 1 trillion “One Belt, One Road" economic strategy, an ambitious program of infrastructure investment in transport, telecommunications, and energy intended to link Eastern markets with Europe and Africa.  

Hong Kong making moves in the domicile race 

Historically, Hong Kong was seen as a market for distributing Luxembourg-domiciled UCITS funds similar to Taiwan and Singapore. However, the Asian trade hub is now positioning itself as a fund domicile and gateway to China since the 2015 launch of the MRF program with the Mainland. The MRF, which gives approved funds a conduit to both markets, has made the establishment of Hong Kong-domiciled funds more attractive. 

According to a report from Hong Kong's Securities and Futures Commission,3 the total assets under management of the territory's mutual fund industry surged 29.4 percent to USD 1.6 trillion by the end of 2017. Luxembourg-domiciled funds still dominate the market, at 46 percent of authorized products, but Hong Kong-domiciled products are gaining ground. They now account for 34 percent of all mutual funds and unit trusts registered for sale in the territory, up from 32 percent at the end of 2016. 

The MRF, which gives approved funds a conduit to both markets, has made the establishment of Hong Kong-domiciled funds more attractive

However, cross-border fund flows between China and Hong Kong have disappointed. At its inception, the MRF was projected to support 100 Hong Kong-domiciled funds and 850 Mainland Chinese funds. Yet only 50 Mainland funds had been approved under the MRF for sale in Hong Kong by the end of 2017, with only 10 Hong Kong funds approved for distribution in China, the SFC reported.

Engaging the Mainland 

As an increasingly popular fund vehicle, the OFC is seen as a catalyst to lift the sluggish growth in cross-border trade between Hong Kong and the Mainland. Unit trust structures are often faulted for being inflexible once established and not necessarily suitable for some investment strategies used by public and private funds. They are relatively unpopular in markets that lack well-established trust laws, such as Mainland China. To that end, the new OFC vehicle, which will be structured as a corporation with limited liability and variable share capital, may prove more attractive for Chinese fund managers.5 Along with the MRF agreements signed with Switzerland (December 2016) and France (July 2017), the OFC regime should also promote distribution of Hong Kong-domiciled funds to other offshore markets, including Europe, given it offers a structure that is globally recognizable.

The OFC is seen as a catalyst to lift the sluggish growth in cross-border trade between Hong Kong and the Mainland

Hong Kong is not alone in seeking a more competitive edge with open-ended company structures. Australia is due to launch its new Collective Investment Vehicles scheme in 2018, while Singapore plans the launch of the Singapore Variable Capital Company and the Corporate Collective Investment Vehicle also this year. All offer alternatives to the historical unit trust structure in a bid to attract more international investment. However, Hong Kong's privileged access to China is seen as the base on which the OFC regime can increase the competitiveness of locally domiciled funds and their marketability across the globe.7 The proposed profit tax exemption for onshore private OFCs could also tip the scales in Hong Kong's favour.

Attracting more mutual and private funds to domicile in Hong Kong is critical in order to boost the territory's status as not only an Asian financial hub, but also a true global player. Fund markets will closely watch how the new OFC structure is received when it makes its official debut later this year.

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Sources

  1. Hong Kong Monetary Authority (February 8, 2018) Hong Kong's strategic position of “leveraging the Mainland while engaging the world"
  2. Ibid.
  3. International Adviser (February 26, 2018) Hong Kong's total assets under management soar 30% in 2017
  4. Ibid.
  5. Llinks Law Offices (January 2016) Open-ended Fund Company: A new initiative for HK to attract funds to domicile
  6. BNP Paribas Securities Services (February 13, 2018) Hong Kong Open-ended fund company (OFC) - regulatory memo
  7. Ibid.
  8. Ibid.