A small number of Chinese fund management houses are bringing their mainland research expertise to global clients and taking the first step in a broader international expansion plan by opening Hong Kong subsidiaries.
Six firms have received approval from Hong Kong regulators in the past 18 months and more are expected to join them soon. The mainland firms have considerable work to do before they pose a serious competitive threat to the established international players, but they are in a better position to compete with European or US fund houses on selling Chinese investment advice to foreign investors.
“Our internationalisation could have started anywhere, but Hong Kong is closer to mainland and really part of China, so it’s a natural choice,” says Michele Bang, chief executive of Harvest Global Investments. “The core of our strategy is to be a well performing fund for China equities and the Asian asset class.”
Deutsche Asset Management, which owns 30 per cent of Harvest Global’s mainland parent company, transferred some Hong Kong-based funds and managers to the new subsidiary when it launched in September 2009. It has more than $2bn under management and an established client base.
Matt Feldmann, partner at Clifford Chance, says most of the Chinese groups are establishing private equity funds to invest back into China, in addition to doing discretionary asset management for local clients, running local retail funds, and assisting their parent companies with their Qualified Domestic Institutional Investor products, which provide Chinese investors with access to international markets.
But more importantly, a Hong Kong subsidiary gives them experience with international clients and a more diverse product range.
“It is easier for some of them to be recognised by foreign regulators if they are already SFC [Securities and Futures Commission] licensed,” Mr Feldmann says.
Many Chinese companies covered by mainland analysts have shares trading on the Hong Kong exchange as red chips (for companies incorporated outside mainland China) or H shares (for companies incorporated on the mainland), making Hong Kong a natural place for Chinese fund managers to set up their first international offices.
“Obviously Chinese players are here to innovate in the China asset class and Asian equities going forward because that is our strength.
“Whether it is QFII money trying to invest in China [the qualified foreign institutional investor programme enables foreign investors to buy A shares quoted on mainland
stock exchanges] or QDII going abroad, we have a business model here where Chinese managers can play a role,” Ms Bang says.
Hong Kong subsidiaries are still a long way from meeting the criteria to compete on QFII products, which require at least five years of experience in asset management and $5bn in assets under management.
However, having a Hong Kong presence may help them sell their research capabilities to global funds that do get QFII quotas.
“For global managers, to the extent that they want to focus on China and
Asian equities, they are not very close to the ground, so they will have to think of how to beef up their research capability,” says Ms Bang.
The entrance of Chinese firms brings a change to the Hong Kong investment fund community, which has until now been characterised by foreign groups trying to get a foothold in China.
“The information needs may be different, the issues and problems they are facing are different, and even languages are different,” says Sally Ho, chief executive of the Hong Kong Investment Fund Association. “So, apart from the more basic generic services, we need to be very versatile in prioritising and in managing the changing dynamics.”
The Closer Economic Partnership Agreement, initially signed in 2003, has made it easier for Chinese fund managers to come to Hong Kong by recognising mainland financial professional standards, and in May 2008 the China Securities Regulatory Commission began issuing licences to the country’s top fund managers that allowed them to expand outside China.
“Not everyone gets a licence. The CSRC makes sure you have a strong capability and a good track record as they don’t want to see fund managers in scandals outside of China,” says Sheldon Gao, president of China Universal Asset Management, which opened its Hong Kong office in February.
“We want to use Hong Kong as a platform to build our investment team, have more international capability and experience. For that, Hong Kong is much better than Shanghai or Shenzhen. Being here gives us a better understanding of the global market,” Mr Gao adds.
He says the first goal is to set up a Hong Kong equity fund to sell to global institutional investors, but he hopes mainland regulators will eventually allow renminbi-denominated funds for foreign investors.
“All the fund companies, including us, that have set up offices in Hong Kong are lobbying regulators to allow more business in Hong Kong. Now we can only run Hong Kong equity funds, but we definitely want to do more things,” says Mr Gao.
Several Chinese banks, such as China International Capital Corporation Limited and CCBI, the investment bank owned by China Construction Bank, have also opened fund management operations in Hong Kong.
Despite the importance to his parent company of having a Hong Kong branch, Mr Gao is realistic about the international impact that mainland funds can have in the short term.
“We understand our shortcomings. We have limited investment capabilities here as we’re focused on H shares and red chips, we have no existing branding, and we don’t have a long-term track record.
“We are starting from scratch, and we need more time to get some experience. In 10, 20 years, I think we will have changed the market, but not now.”