A look at the role of MRF in Hong Kong’s cross-border ambitions.
An interesting storyline in the go-go world of cross-border funds is Hong Kong’s drive to become a leading fund hub. Policy moves such as the mutual recognition agreement with Switzerland or the proposed ETF Stock Connect have helped build excitement over Hong Kong’s future as a fund hub. However, no other policy initiative has captured the imagination of the industry quite like the MRF (Mutual Recognition of Fund) passport between Mainland China and Hong Kong. Launched in 2015, the MRF is a cross-border fund passport that allows funds domiciled in Hong Kong and Mainland China to be sold in either market.
Given the growing interest in Hong Kong, we recently conducted a survey of global asset managers to understand the opinion on Hong Kong’s prospects to become a leading cross-border domicile. The survey found that that 80% of respondents believe there is a medium to high probability that Hong Kong will be a leading Asian cross-border fund domicile by 2025. One of the areas of focus was on the importance of the MRF to Hong Kong.
MUTUAL RECOGNITION OF FUNDS
The MRF was flagged by 63% of the respondents as either critical or very important to Hong Kong’s ambition to become a global fund hub. This is not surprising given it is Hong Kong’s position as a gateway to China that has excited many in the industry.
Currently, Hong Kong has exclusive access to the MRF program. However, only 20% of the respondents thought that Hong Kong would maintain its exclusivity in 2025, with 33% predicting that Hong Kong would lose exclusive access. Interestingly, almost half of the respondents were unsure. This ambivalence may be explained by the fact that, on one hand, Hong Kong has been given exclusive access to China with the expectation that access will be expanded over time; and on the other hand, there is a stated policy goal to grow Hong Kong as a fund domicile.
Of those who didn’t think Hong Kong would maintain exclusive access to the MRF or were unsure, a staggering 86% thought MRF would open up to other domiciles within five years, with almost 50% predicting it would be within three to five years. Though it is always hard to predict the future, we believe the expansion of MRF to other jurisdictions is at least five years away.
When asked which domiciles were likely to get access to the MRF, this cohort was split. The top three selections were Singapore, the EU, and the UK. Of these, the two western jurisdictions are interesting choices.
We have long argued that it is unlikely the EU will get access to the MRF. The biggest reason for this is that the MRF is inherently a bilateral agreement. This means, in order for EU funds to access Mainland China, the EU would need to allow Mainland Chinese funds to be sold into the EU. Given how the EU has dragged its feet in extending the AIFMD passport to non-EU countries, this seems unlikely.
The UK is a more interesting case. In light of the decision by the UK to withdraw from the EU, it is more plausible that the UK and Mainland China could establish mutual recognition. Both countries have indicated they would like to have closer ties, demonstrated most recently with the proposed London-Shanghai Stock Connect. Once the UK exits the EU, it will be free to negotiate mutual recognition with China. However, it is unlikely for these discussions to start before the formal UK exit, which will not happen until 2019 at the earliest.
Establishing a Fund in Hong Kong
Judging by our survey results there is clear enthusiasm for Hong Kong to develop into a leading fund domicile. However, despite the enthusiasm, a measure of caution should be taken. Moving into the region requires long-term commitment. In particular, there are local substance requirements to be considered. For example, in order to access the MRF from Hong Kong, fund managers must have a physical presence in Hong Kong and will need to be registered and hold the appropriate local license. Before a fund can apply for an MRF passport it must have a track record of at least one year and a minimum size of RMB 200 million (~$29 million). While the MRF may have captured the imagination of the industry, it has been slow to get off the ground. Given these requirements and the market dynamics, asset managers must plan ahead if they want to take advantage of this growth opportunity.
Note: This article is an excerpt from our whitepaper Cross-border 2025: The Rise of Hong Kong. Visit bbh.com/crossborder2025 for the full report of our findings and more insights on the cross-border fund market.