Hong Kong: Hong Kong: The Investment Fund Industry’s Gateway to China

Last Updated: 29 November 2007
Article by Timothy Loh and Gavin Cumming

For investment managers around the world, the race to capture market share in the People’s Republic of China ("PRC") has begun. For anyone doubting the potential of this emerging market for wealth management:

  • in September and October, 2007, 4 investment funds launched under the Qualified Domestic Institutional Investor ("QDII") scheme raised a combined total of RMB 120 billion (approximately US$16 billion);
  • all 4 issues were heavily oversubscribed, often within the first day of the offer period; and
  • aggregate actual subscription applications exceeded RMB 280 billion (approximately US$37 billion), more than twice the QDII quota allotted to these 4 funds.

QDII

The QDII scheme allocates foreign exchange investment quotas to qualified domestic institutional investors. These investors may, in turn, accept assets from PRC persons for investment and, subject to prescribed regulations, invest those assets into overseas financial products.

Banks

The China Banking Regulatory Commission ("CBRC") was the first to establish regulations for QDII, announcing on April 13, 2006 that qualified PRC banks with QDII allocation would be permitted to invest in fixed income and money market instruments. Since then, the CBRC has relaxed investment criteria, permitting in May, 2007 qualified PRC banks to invest assets of a sponsored QDII fund in securities which are listed, and funds which are authorized, in jurisdictions which have signed a Memorandum of Understanding ("MOU") with the CBRC.

The Hong Kong Securities and Futures Commission ("SFC") is currently the only securities regulator with whom the CBRC has signed an MOU. As a result, SFC authorized funds now serve as a crucial point of access for PRC banks with QDII quota wishing to gain exposure to global equities markets.

Fund management companies

Not to be left out, on June 20, 2007, the China Securities Regulatory Commission ("CSRC") announced regulations allowing qualifying fund management companies with QDII allocation to invest 100 per cent. of the net assets of a sponsored QDII fund in securities which are listed, and funds which are authorized, in jurisdictions whose regulators have signed an MOU with the CSRC.

As the SFC is one of the regulators with an MOU with the CSRC, SFC authorized funds are eligible investments for QDII funds established by qualifying PRC fund management companies.

Growth In AUM

Following the announcements of the CBRC and the CSRC earlier this year, retail interest in QDII products has been enormous. Against the backdrop of inflated domestic stock markets and the need to diversify investments, investment funds sponsored to take advantage of QDII allocations ("QDII funds") have been overwhelmed by subscriptions. In September and October this year alone, QDII funds have seen extraordinary investor demand.

China Southern fund

A QDII fund sponsored by China Southern Fund Management Co. received more than RMB 49 billion (approximately US$6.6 billion) in subscriptions on the first day of its offer period. The fund’s QDII initial quota was only RMB 15 billion (approximately US$2 billion), although this was subsequently increased to RMB 30 billion (approximately US$4 billion) due to the overwhelming demand.

China AMC fund

A QDII fund sponsored by China AMC received RMB 63 billion (approximately US$8.5 billion) in subscriptions, more than double the QDII quota which had been allocated to the fund.

Harvest fund

A QDII fund sponsored by Harvest Fund Management Co. received RMB 73.8 billion (approximately US$9.9 billion) in subscriptions, against a QDII quota of RMB 30 billion (approximately US$4 billion).

China International fund

A QDII fund sponsored by China International Fund Management Co. received more than RMB 100 billion (approximately US$13.32 billion) in subscriptions on the first day of its offer period. The fund’s QDII quota was RMB 30 billion (approximately US$4 billion).

Opportunities Ahead

For investment managers outside of the PRC, the QDII scheme presents opportunities to advise on the management of assets of a QDII fund and to manage those assets by offering investment funds into which QDII fund assets may be invested. In the latter case, whilst the establishment of a distribution partnership presents its own issues, the establishment of an SFC authorized fund offers an attractive point of entry into the PRC market.

SFC funds eligible as QDII investments

As noted above, SFC authorized funds currently serve as a crucial point of access for PRC banks with QDII quotas to obtain global exposure to equities. Furthermore, SFC authorized funds are eligible investments for fund management companies with QDII quotas. Consequently, an SFC authorized fund offers maximum flexibility in pursuing PRC distribution.

SFC funds key to untapped bank QDII quotas

To date, 21 PRC banks have received QDII allocations, with a combined QDII quota of US$16.1 billion. A large proportion of this quota remains unused.

SFC funds key to distribution

PRC banks offer the widest retail distribution network in the PRC with approximately 80 per cent. of all fund sales taking place through bank branches.

Hong Kong contingency

At the same time, Hong Kong investment funds account for approximately 2.7 per cent. of the global investment market, roughly comparable to Canada which trails at approximately 2.5 per cent. In the first half of 2007, the Hong Kong investment funds industry registered gross sales of US$20 billion and net sales of US$4 billion. As a result, SFC authorization brings with it not only access to the PRC market but also a major and growing global funds market in the form of Hong Kong.

SFC Authorization

The SFC is receptive to a range of different fund structures. There is no requirement for the fund to be domiciled in Hong Kong. Indeed, as at the end of March, 2007, approximately 51 per cent. of SFC authorized funds were domiciled in Luxembourg, 19 per cent. in the Cayman Islands, 17 per cent. in Ireland and 5 per cent. in Hong Kong.

To be authorized in Hong Kong, investment funds should comply with the Code on Unit Trusts and Mutual Funds ("Mutual Fund Code") or, in the case of specialized funds such as real estate investment trusts, other applicable codes. Broadly, to obtain authorization, overseas investment funds must satisfy the SFC on 2 matters:

  • the suitability of their structural and operational requirements and investment restrictions; and
  • the suitability of their investment manager.

Core Structure

In assessing the suitability of an investment fund’s structural and operational requirements and investment restrictions, the SFC differentiates between investment funds domiciled in recognized jurisdictions ("Recognized Jurisdiction Schemes") and other investment funds.

Recognized jurisdiction schemes

Recognized Jurisdiction Schemes are investment funds regulated in recognized jurisdictions, namely France, Germany, Guernsey, Ireland, the Isle of Man, Jersey, Luxembourg, the United Kingdom and the United States.

Recognized Jurisdiction Schemes are fast tracked and are reviewed by the SFC on the basis that the investment fund’s structural and operational requirements and core investment restrictions already comply in substance with the Mutual Fund Code. However, the SFC expects recognized jurisdiction funds to comply in all material aspects with the Mutual Fund Code and reserves the right to require such compliance as a condition of authorization.

UCITS investment funds

UCITS investment funds regulated in Luxembourg, Ireland or the United Kingdom form a special category of Recognized Jurisdiction Schemes which may benefit from fast track authorization. However, UCITS investment funds which use financial derivatives instruments for investment purposes are subject to a higher degree of scrutiny.

Other schemes

If an investment fund is not a Recognized Jurisdiction Scheme, authorization generally requires full compliance with the provisions of the Mutual Fund Code unless the SFC grants a waiver. For investment funds which have already been commercialized, compliance with the Mutual Fund Code may present hurdles, particularly where the existing constitutive documents do not comply substantially with the Mutual Fund Code.

Investment Manager

The SFC generally requires that the investment manager be based in a jurisdiction ("AIR Jurisdiction") with an acceptable inspection regime (currently Australia, France, Germany, Ireland, Hong Kong, Luxembourg, the United Kingdom and the United States). However, exemptions from this requirement may be granted on a case by case basis.

A sub-manager to whom the investment manager delegates investment discretion need not be based in an AIR Jurisdiction provided that the sub-manager meets certain requirements, including that it be within the same corporate group as the investment manager, that it have internal controls commensurate with those expected under the Mutual Fund Code, and that it be regulated in its jurisdiction of operation.

TIMOTHY LOH, SOLICITORS serves as Hong Kong and International Legal Counsel to financial institutions. Since its establishment in 2004, its clients have included 10 financial institutions ranked in the FT Global 200 and it has been recommended each year by the Asia Pacific Legal 500 for its financial services and regulatory practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions