Newgate Communications’ Dan Billings takes stock of the MRF hype to see if there is a way for Asset Managers to build bridges early on
The Mutual Recognition of Funds (MRF) scheme is another coordinated effort between securities regulators in Hong Kong and Beijing to globalise the mainland Chinese capital markets. Similar to the Hong Kong-Shanghai Stock Connect program launched in 2014, funds approved under the MRF scheme will for the first time be available to mainland Chinese and Hong Kong investors alike.
While certainly a milestone in the continued opening of China’s capital account, the timing for MRF’s launch could not have been worse for investors. The circular announcing details of the scheme was distributed on 22 May 2015 – since then global equity markets have dramatically fallen into (or nearly into) bear territory, with China’s slowing economy blamed as the primary catalyst.
Chinese fund products don’t have the same appeal to international investors as they did last spring, but tough market conditions haven’t stopped the MRF scheme from advancing. At latest count, seven Hong Kong domiciled funds have been approved by the scheme to sell in China (so-called “northbound” funds), while 32 China-domiciled funds have been approved for sale in Hong Kong (“southbound” funds).
Indeed there have been both more applications and more approvals for southbound funds than northbound, illustrating the importance of the scheme to Chinese asset managers looking to grow their asset base.
While the takeoff runway for MRF may be longer than expected, the scheme is another boon in Hong Kong’s continuing efforts to solidify its place at the center of China’s capital markets. It maintains the city’s attractiveness as the primary domicile for international asset managers to manage their Asian operations, while it also draws new Mainland Chinese asset managers to the market as a safe and transparent place to interact with western investors.
The funds universe is already crowded and set to become even more competitive – it’s more important than ever that asset managers think critically and urgently about their communications strategy.
Who can play in the sandbox?
The China Securities Regulatory Commission will approve northbound funds for sale in the mainland, while Hong Kong’s Securities & Futures Commission will approve Chinese funds for distribution in the SAR. Fund sales will have a quota of 300 billion RMB on both sides of the border. Most of the available products will be conventional in their asset class mix – equities, bonds, and index funds (including ETFs) will be on offer.
Both the mainland and Hong Kong regulators have agreed to eligibility requirements intended to comply broadly with international best practice in terms of governance, disclosure, liquidity and other metrics.
Mainland funds are expected to follow Hong Kong standards of distribution and disclosure (“complete, accurate, fair, clear, effective, and … capable of being easily understood by investors”). This may be the first experience Mainland asset managers have in dealing with Hong Kong’s SFC – understanding the expectations of the regulator is thus an immediate issue to resolve for Mainland funds entering the SAR.
Challenges for Global Asset Managers
Capital outflows from China in response to slowing economic growth may be a big bump in the road for MRF, but global asset managers would be wise to look at the scheme as a long-term game. Indeed, perhaps more than ever, mainland Chinese investors are hungry for global investment opportunities.
Foreign asset managers that were previously unrecognisable to the Chinese investing public will find themselves with a new task: branding themselves to one of the world’s most coveted investor bases. They will have to think differently about their Hong Kong business to stand out in a crowded market for new investment products.
How will these western funds attract capital away from the established Chinese brands? Indeed, the recent trend in Mainland consumer tastes show that Chinese consumers increasingly prefer Chinese brands. A few years ago, multinational luxury brands thought selling their products to China’s new billionaires and expanding middle class as shooting fish in a barrel, but sales haven’t lived up to the lofty expectations. Asset managers may face a similarly unwelcome response from Chinese investors.
With that in mind, those banks with a longstanding presence and a strong reputation in Asia, for example HSBC or Standard Chartered, have a clear advantage out of the gates. Over time, international players will need to carefully tailor their marketing efforts in China to gain genuine trust with the investing public. Diversification as a theme will likely be well-received by Mainland investors keen to minimize risks in their own unpredictable market.
Challenges for Chinese asset managers entering Hong Kong
Mainland asset managers face a different set of challenges competing in Hong Kong. They will need to quickly acquaint themselves with Hong Kong fund regulations, and market their brands to a western investor base they are not necessarily familiar with.
Governance will also be a key concern. Most of the regulatory detail around the MRF scheme concerns eligibility requirements for products from CSRC-regulated funds. It’s a clear move to give some assurance to international investors that mainland funds sold under MRF meet Hong Kong’s proud governance standards.
While weak governance is often forgiven during boom times, these same issues can become a critical priority for investors in down markets when good governance can mean the difference between gains and losses. Chinese asset managers in particular will need to bring their governance and sustainability policies to the forefront of their marketing and distribution efforts.
What to Expect in the Near Term
There will be winners and losers among asset managers participating in the MRF-scheme – competition for capital will be fierce, and marketing efforts could be at best ineffective or at worst value-destructive.
Furthermore, as the IMF noted in its annual country report on Hong Kong, the further intertwining of Hong Kong and China’s capital markets also increases the risk of financial shocks in China spreading to Hong Kong’s “small and open” economy. It will be important for market observers to watch closely the daily reporting of mutual fund redemptions as the MRF scheme progresses.
Inarguably though, the big winners will be Chinese investors, who will finally have access to global investment opportunities in a market that meets global best-practice in governance, transparency, disclosure and liquidity.
It is also a huge win for Hong Kong, which remains as relevant as ever in bridging Mainland and global capital. Just as luxury brands have long seen Hong Kong as a shop-front to brand themselves in the Asian consumer market, the Hong Kong cityscape itself will be the primary marketing platform for fund managers to promote themselves. Communications will be a critical component of these efforts.
Dan Billings is Director, Financial Practice, in Newgate’s Hong Kong office
He can be contacted at firstname.lastname@example.org or via +852 3758 2685