Bank of Beijing Scotiabank Asset Management, a Chinese joint-venture between Bank of Beijing and Canadian Bank of Nova Scotia, set up its overseas arm in Hong Kong two years ago.
But BOB Scotia is not considering launching mutual funds, said Ko Tseng, executive director of the firm’s Hong Kong office, because it remains difficult for Chinese managers to sell products in Hong Kong, including mutual funds and ETFs.
Tseng, who previously worked as managing director at E Fund Management’s Hong Kong arm, explained that the first wave of about ten Chinese asset managers started operations in Hong Kong around 2010 and rolled out mainly China fixed income mutual funds or ETFs tracking A-shares.
But the products are too similar and do not stand out in the crowded SAR market, where only a few banks dominate fund distribution.
Instead, BOB Scotia will focus on the high net worth investor base and may launch some non-public fixed income funds, he added.
The onshore firm, Bank of Beijing Scotiabank Asset Management, is relatively new, set up in 2013. Its product suite comprises mainly money market funds and fixed income products. Tseng noted that the majority of investors, sourced from Bank of Beijing’s wealth management client base, are conservative in nature.
Even with offshore investments, these clients mainly look for US dollar fixed income assets with the main purpose of protecting capital, he added.
The joint venture has just been granted a Qualified Foreign Institutional Investor (QFII) quota of $200m. Tseng said the next step will be getting overseas clients, including those in Hong Kong, Taiwan and Korea, to invest onshore.
China’s institutional clients
Another Chinese asset management joint venture, Rongtong Fund Management, (Nikko AM and China’s New Time Securities), intends to stay away from retail and focus on China’s institutional base for its cross-border businesses, said deputy CEO Allen Yan.
The partnership started in 2005 when Rongtong began providing research and advisory services to Nikko. In 2007, Nikko bought a stake in the Shenzhen-based fund house.
In 2014, Rongtong set up its offshore business in Hong Kong, led by Yan.
The Hong Kong arm (Rongtong Global Investments) serves the institutional client base only, advising and managing all cross- border-related products. These are mainly outbound investments via the Qualified Domestic Institutional Investor (QDII) programme.
The firm also helps manage offshore money investing in mainland China, but there is limited demand due to concerns about the weakening RMB and a potential credit crisis.
Offshore demand
In contrast, Chinese investor demand for offshore assets has been growing. Rongtong was granted $900m of QDII quota to invest Chinese money offshore and it was fully used by mainland institutional clients back in 2015, Yan said.
China has suspended issuing new QDII quota, a key channel for onshore institutions to invest overseas, since March 2015, in order to stem the flow of capital out of the country and support the RMB.
“The demand is still there, as [institutional investors] generally only have a 1-2% allocation to offshore assets”, he told FSA.
“As yields in China keep falling and the RMB weakens, mainland institutions also show interest in Chinese fund houses with overseas investment experience [to help manage the assets].”
Although the QDII quota has been fully used, he added there are other channels, such as the Stock Connect, for mainland clients to diversify by adding foreign assets.
Mainland investors still hold a home bias, favouring Hong Kong equities and offshore bonds issued by Chinese companies, he added.
The firm has launched two Cayman Islands-registered funds which invest in Chinese assets outside of mainland. One fund invests in Hong Kong equities.
“In terms of investments, now we focus more on Hong Kong stocks, especially as the anchor investors in new listings.”
Still, if a client wants overseas exposure other than China-related assets, Rongtong would use Nikko’s offerings, he added.
Rongtong also expects to launch in Hong Kong two mainland mutual funds through the Mutual Recognition of Funds (MRF) scheme: the Rongtong Health Care Industry Mixed Fund and the Rongtong SZSE100 Index Fund which tracks the performance of 100 largest A-shares listed on the Shenzhen Stock Exchange.
However, due to weak demand for southbound MRF sales, they have held off on actual sales. Distribution of mainland-focused funds is a challenge in Hong Kong, he added.
“We don’t think we are capable of tapping into the retail business at the moment.”
