China’s growth may be slowing, but the investment opportunities presented by the world’s second-largest economy continue to expand. This was abundantly clear at a breakfast briefing Calastone held in June to discuss the opportunities associated with the Mutual Recognition of Fund (MRF) program, which celebrated its first anniversary on 1 July 2016.
The session, headlined Opportunities and challenges presented by MRF for Hong Kong and Chinese asset managers, included presentations by Jasmine Baker, Analyst with Z-Ben Advisers and Leo Chen, Director, Asia Sales, Calastone and Ganesh Valakati, Senior Manager, Product Solutions, Regulatory Change, HSBC.
Accessing the underserved Mainland China market
The current opportunities and challenges China’s onshore investment market represents for international asset managers is nothing short of astonishing. Jasmine Baker opened the briefing by pointing out that China has the potential to deliver a whopping 25% annual growth over the next 5 years, China Retail Mutual fund AUM would grow from USD 532bn to USD 1.6 Tr by 2020. So, over 1 trillion USD of new money for retail funds in China.
This opportunity is all the more enticing as Chinese investors are currently woefully undeserved by the investment options available to them.
China’s capital account is largely closed, meaning that offshore markets are mostly off limits to domestic investors. Meanwhile, although domestic stock markets have grown rapidly over the past decade, they remain young, shallow and can be volatile at times. Finally, while the domestic bond market is now the largest in Asia ex-Japan and the third largest globally, it remains nascent in areas such as credit ratings.
The silver lining for China investors is that gaps have opened in the nation’s capital account over the past few years. Indeed, a bevy of inbound and outbound investment channels that range from the Qualified Domestic Institutional Investor (QDII) scheme to the Shanghai-Hong Kong Stock Connect (SHKSC) program have allowed a trickle of domestic investment to enter international markets.
MRF is a game changer
Despite this alphabet of investment channels, what became clear during the brief in June is that MRF is likely the most significant cross-border investment development to date. The program got off to a slow start, but attendees largely agreed that it has the highest potential to deepen capital market flows between Mainland China and global markets.
In a nutshell, the MRF program allows qualifying Hong Kong domiciled mutual funds to be distributed in Mainland China and vice versa. The program is currently limited to an aggregate RMB300 billion in investment that must be equally split between mainland and Hong Kong domiciled funds. However, these regulations are expected to gradually ease and ultimately to be lifted.
The “secret sauce”: Fund distribution under MRF
Of course the MRF program does not hand the Mainland China mutual fund market to international asset managers on the silver platter. Far from it! The application process is complex and not completely transparent.
Indeed, the briefing convinced me that there are three keys to success under the MRF program:
- Careful preparation – It is imperative to cross your T’s and dot your I’s when applying for the program. This includes checking and double checking that all the proper documentation is in place and that all of the required licences are in place and renewable.
- Long-term planning – It is essential to have multiple distribution channels in China, with online being particularly important but not necessarily sufficient on its own. This entails building strong relationships with distribution partners and hammering out a solid marketing strategy to support distribution.
- Brand strategy – Foreign asset managers should not underestimate the importance of brand in the Mainland China market, where even some of the largest global asset management names are unknown. This places a premium on choosing strong local partners and further heightens the importance of marketing.
MRF in action: Case studies in China market entry
So having passed the first anniversary of the MRF program launch, how have offshore asset managers done in the China market? As of March 2016, a total of 35 southbound funds had been approved but only six northbound funds – of these, 16 of the southbound funds are now available for sale in Hong Kong but only four of the northbound funds have been launched.
A quick look at the first launch, by Hong Kong-based Zeal Asset Management, is instructive. Zeal prepared carefully and was poised to reach investors via online distribution, which has enjoyed enthusiastic uptake in China. However, the company quickly hit a roadblock as problems with its distribution partner delayed the launch until distribution deals could be inked with larger and more reliable Mainland China partners.
The takeaway here is that despite its diligent preparation, Zeal was ultimately knocked off course by failure to secure distribution redundancy. In a market where its name is little known, the company’s prospects ultimately rely on the strength of it partner – and is only made stronger by the presence of multiple partners.
The future of MRF
The breakfast briefing ended with a panel discussion on distribution trends in China and the future of MRF. Listening to the special guests – Stewart Aldcroft, Managing Director, Citi Markets & Securities Services; Eleanor Wan, CEO, BEA Union Investments; Andrew Xia, Chief Research Officer, Noah Holdings; and Keith Neo, Executive Director, IFast Financial China – the takeaways outlined above were repeatedly reinforced.
I left the briefing session – and passed the first anniversary of the MRF launch – optimistic that well-prepared asset managers allied with strong distribution partners and a solid marketing plan are entering an era of a great opportunity in China.