Five Asset Management Opportunities in Greater China

 

Significant political, economic, and regulatory policies continue to evolve within Greater China, increasing cross-border financial activity. Asset managers must stay close to these developments to capture the growth opportunities, or else risk losing out.

We have long maintained that well-framed regulation often acts as a catalyst to growth and innovation. Nowhere has regulation acted as an instrument for growth more than Greater China.  The recently announced Belt and Road initiative is an ambitious development campaign to boost China’s trade and stimulating economic growth. The project represents a significant opportunity for asset managers and it’s not the only iron on the fire.

There are five recent developments that broaden the spectrum of investment opportunities in Greater China for asset managers. Let’s have a closer look at each of them.

1. China A-Shares added to MSCI – The Long Wait is Over

After more than four years of debate and a number of false dawns, MSCI finally added China A-shares to its Emerging Markets Index on 20 June 2017. While the actual index re balancing begins next May, 222 Chinese onshore-listed stocks will be part of this index by year end 2018.[1] It represents a seminal moment for the liberalization of the Chinese investment markets and further suggests global asset managers should develop a strategy for the region.

2. Mutual Recognition of Funds – Breaking New Ground

In December 2016, Hong Kong and Switzerland brokered the first ever deal between an Asian and European jurisdiction allowing registered funds unfettered access to one another’s markets. Since then, Hong Kong has penned an agreement with France on funds and a more general regulatory cooperation agreement with the UK. Transcontinental agreements are new and it remains to be seen if they will gain further traction.

The French arrangement is particularly noteworthy as it’s the first agreement involving Asia and the EU. Its significance lies in the new-found possibility that UCITS may now sell into Hong Kong on identical terms to domestic funds. France has broken from the EU pack with this deal, but a future EU-Hong Kong deal is not beyond the realm of possibility.

Hong Kong wants to bolster its local fund industry and continues to build on its Mutual Recognition of funds program with China. Hong Kong continues to face competition for investors from UCITS and in the medium term the planned Asia Region Funds Passport (ARFP).

3. ARFP – Lift Off at Last?

Moving slightly beyond the boundaries of Greater China, we’ve previously spoken about the slow burn that is the ARFP. In recent months however, participating countries such as Singapore and Australia have each looked to remove the primary constraint to passporting which is the absence of corporate vehicles in their jurisdictions. Corporate vehicles have formed a major part of the UCITS cross-border success story; however the majority of Australasian funds utilize trust structures currently. Corporate vehicles have commercial advantages over unit trusts for cross-border activity, as they can enter into contracts directly, limit liability, or simplify asset ownership and tax treatments.

4. Bond Connect – The New Kid on the Block

The Hong Kong-China Bond Connect program went live on 3 July. Northbound trading facilitates access for international investors to the China Interbank Bond Market (CIBM) and is already up and running. Trading volumes of CIBM are estimated to be $9 trillion[2]. As with the equity version before, Stock Connect, trade volumes have been relatively modest to date, but are expected to grow as momentum builds.

One wrinkle that needs to be ironed out is that Bond Connect doesn’t meet some UCITS or Alternative Investment Fund Managers Directive (AIFMD) standards. This industry is working to recalibrate certain components of the trade, settlement, and safekeeping mechanics so EU-regulated funds may use Bond Connect. There are also elements of uncertainty surrounding ownership limits and tax treatment, so whilst it has some teething problems, asset managers should familiarize themselves with Bond Connect as it becomes increasingly important within global investment.

5. Hong Kong Stock Connect – Always Evolving

The Shanghai-Hong Kong Stock Connect, established in 2014, enables orders on the Shanghai Stock Exchange (SSE) to be placed through a broker in Hong Kong. Along with the Shenzhen version, these market access programs have already been successful, however they have not rested on their laurels.

Stock Connect has upgraded its model with the introduction of an enhanced special segregated accounts service (SPSA) model. This new trading model reduces counter-party risk by settling the trades faster, thus reducing exposure to brokers. The SPSA model has increased foreign investor confidence on counter-party risk and resulted in attendant increase in trading and interest in Stock Connect.

Similar to Bond Connect, regulated EU funds are not authorised to invest through the SPSA model, but requests for permission from EU regulators are pending. This willingness to evolve to match global regulatory standards to the benefit of end investors is another reason why the Greater China investment story is likely to succeed.

Procrastination is Opportunity’s Assassin

These changes cannot be ignored by any asset manager. The initiatives demonstrate the strong collective willingness of China’s policymakers to swiftly foster a larger more inclusive investment market in their country and beyond. While there is little doubt that Greater China will continue to be strategically important for global asset managers, grasping the opportunity requires prompt decisions and action or else risk losing out.

[1] Funds Europe, China A-shares: The gates are open. Now what?, 21 June 2017.

[2] Wall Street Journal, How Much Do You Know About China’s Stock Market?, 4 June 2017.