Rosita Lee, Hang Seng Bank
Participation in the QDII programme will allow the Hong Kong-headquartered bank to launch products on the mainland that allow domestic investors to invest offshore.
The growing appetite of domestic investors for international diversification will result in a broader range of products allowing them to invest outside of China, Lee, who oversees both the bank’s asset management arm in Hong Kong and the mainland joint venture, told FSA.
The overall fund industry in China will benefit from the regulator’s decision to resume issuing quota for the QDII programme after the three-year suspension, she said.
It is important for non-mainland asset managers to take advantage of the new QDII quota, since other channels facilitating offshore investing have their own limitations, she added.
For instance, the Mutual Recognition of Funds (MRF) scheme, which allows cross-border trading of registered funds between the mainland and Hong Kong, currently offers mainland investors only ten fund products since its launch in 2016.
According to Lee, there are two typical ways that a joint venture can participate in the QDII scheme. The JV can help create a customised mandate for a certain quota holder or invest in the funds that are domiciled offshore.
Onshore asset management joint ventures are also eligible to apply for the QDII quota with several regulatory requirements, such as at least three years since its establishment and a minimum AUM threshold. Therefore, HSQH, which was established in mid-2016, does not yet qualify.
JV ownership share limit
Apart from a revival of the QDII scheme, another notable change in onshore regulation is the recent relaxation, and eventual removal of joint venture ownership limits for foreign players.
In China, late last month, foreign asset managers could only own up to 49% in a Chinese fund management firm. The country’s regulators have now increased this limit to 51% and announced plans to remove the cap completely in three years, allowing 100% ownership of domestic asset managers by a foreign firm.
Hang Seng’s joint venture, in partnership with state-owned Shenzhen Qianhai Financial, is the only asset management JV formed under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). The agreement has established an exception for the bank enabling it to own a 70% stake in the JV. The partnership helps Hang Seng interpret China’s government policies and navigate regulatory issues.
Lee admits that the advantage of being the only non-mainland player owning more than 51% share in a JV may not last due to the enactment of the new rules. However, the further opening up of China’s financial market will be beneficial as the move would lead to a more international market for both domestic and foreign players.
“There is still a period of time leading up to a complete opening up for foreign fund managers. We would try to work harder and develop a better understanding of the onshore market in the upcoming two years.”
“Whether there is a relaxation of the ownership rule for foreign asset managers, the competition is indeed very high already,” she continued.
She added that the bank is under no pressure to follow its peers to establish an investment management wholly foreign-owned enterprises (WFOE) for now, as it is focused on mass market investors in China. Operating a joint venture firm also provides flexibility in marketing of its brand.
HSQH manages two products, the Shanghai-Hong Kong-Shenzhen Emerging Industry Selection Mixed Type Fund and the Hong Kong Stock Connect High Dividend and Low Volatility Index Fund, a smart beta product which was launched last month.
The joint venture plans to launch at least two more products for domestic investors by the end of 2018. Lee revealed that some product ideas include investing in Hong Kong and A-shares equities, consumption-related equities and an actively-managed bond portfolio.