How has the Shenzhen Stock Connect grown over the past 12 months and do you expect that growth to continue?
The implementation of the Shenzhen Stock Connect programme was an important step in the process of ensuring the overall China Connect programme meets the needs of investors. It is fair to say that when it was first implemented, a number of investors were still reticent to gain access to the connect market due to the lack of a real delivery versus payment settlement solution. This was implemented in November 2017 and since then interest in Stock Connect generally has risen significantly from a slow start.
Stock Connect will undoubtedly continue to grow and it is likely that growth this year will outstrip that of 2017 where we saw about a four-fold increase over 2016 volumes. It is fair to say that, while the wider market activity has grown, a large number of potential investors are still becoming comfortable with the operating model. With the inclusion of Chinese securities into the MSCI Emerging Market Index (due in June 2018) and the attractiveness of the returns on offer, I can only see growth heading one way.
There has been talk of another connect programme around ETFs for the Chinese market. How will the introduction of an ETF Connect affect asset servicing provides in Asia and when do you expect this to launch?
Investor interest in exchange-traded funds (ETFs) across the globe has increased significantly in recent times and Asia is no exception. The ETF Connect proposal will allow investors to enjoy the same breadth of investment they get in other markets from a single purchase for their investments into China. At the same time, it is true to say that there is a large push for the ETF Connect programme from China-based investors to allow them to gain greater exposure to offshore investments.
The impacts to asset servicing providers in Asia in part depend on the operating model applied. Will ETF Connect be implemented to compliment Stock Connect, for example, or will it have its own operating model? At present it seems likely that it will be the former and so the impacts to asset servicing providers will not be as significant as they could be from a pure settlement and safekeeping perspective. Of course, we will not know for sure until the authorities release detailed information on the solution which historically has come in short order before the market go-live.
The noise around the market is that we should expect go live in the latter part of the year, which suggests it will be a few months yet before we have any concrete details on the proposed solution. From discussions with market participants we expect an ETF Connect scheme to more closely follow the Stock Connect rather than the MRF schemes.
There is a potential for strong interest from Chinese investors in an ETF Connect scheme as they would be able to access a large range of global ETF funds (almost all large international indices) for the first time.
The recent new approvals in the mutual recognition of funds (MRF) pipeline might be a signal that the Chinese regulator is increasingly willing to change the game and through the various schemes, such as qualified foreign institutional investor, qualified domestic limited partner, or MRF, there could be a new wave of internationalisation on the horizon.
Before September, when I was based in the UK, we already had some discussion around the connect initiatives in Asia, but it wasn’t until I arrived in Hong Kong that I was able to fully appreciate the pace of change here. The speed at which schemes are rolled out is incredible. For example, we saw Bond Connect announced and implemented within only a few months.
With Hong Kong being the gateway to China, have you seen any developments in the Chinese market?
Step by step, the Chinese market continues to open up, and a new series of regulatory reforms and measures have been released in recent months. Offshore investors or asset managers can now access more easily the Chinese market to invest or raise capital.
One of the channels available to foreign investors to get exposure to the Chinese market is the via the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme and in July 2017 the quota allocated to Hong Kong-based investors was nearly doubled. Since Hong Kong has the largest RQFII quota allocation in the world and this has reinforced the role of Hong Kong as the main gateway to access Chinese markets. We have seen a strong increase in the number of Chinese securities held by foreign institutions, with the RMB 1 trillion (approximately €130 billion) mark reached for the first time in August last year for the fixed income market and in September last year for the equities market.
More recently, new measures on fixed income repo activity were released to further promote RMB internationalisation and improve fixed income RMB cross-border settlement. This will allow eligible offshore RMB clearing banks and offshore RMB participating banks to enter the market.
Finally, last year was also a key milestone with the launch of the first private funds fully managed by foreign asset managers in China via a wholly foreign owned enterprise (WFOE). Ten foreign asset managers received a licence and five funds have been launched to date.
Traditionally, Hong Kong has been one of the main hubs for financial services in Asia, how is the country competing with up and coming competitors?
Hong Kong benefits from its long-established fund management industry and its privileged access to Chinese markets. However, competition between fund jurisdictions in the Asia Pacific region is getting more intense. With the launch of new company fund structures in Australia (the Collective Investment Vehicles (CIV) and Singapore (the Singapore Variable Capital Company (S-VACC), Hong Kong is due to launch a new open-ended corporate fund company (OFC) structure this year. This is part of a series of local market infrastructure enhancements to further develop the city as a full-service international asset management centre and provide additional options for fund managers, also including the alternative assets.
Hong Kong is a vibrant city bringing together people and organisations of many different cultures and backgrounds. This allows the Hong Kong financial industry to continue to innovate and provide new business models to support Asian investment. There are areas of the market under pressure from offshore hubs to maintain their regional share.
The Hong Kong government is building an ecosystem to support digital disruption. The regulator is facilitating new projects, creating sandbox and encouraging industry bodies to innovate and leverage the new technological tools available.
The Hong Kong Exchange is looking to dematerialise their settlement platforms and replace legacy technology with the latest platforms that can bring added value and flexibility to their client base.
To maintain Hong Kong’s competitiveness from a fund distribution perspective, a number of initiatives have been put in place by the Securities and Futures Commission, including an mutual recognition for funds with China, Switzerland, France and more in the pipeline. These are in addition to legacy mutual recognition fund scheme with Australia, Taiwan and Malaysia.
There have also been discussions with the EU to be recognised as an equivalent jurisdiction under the Alternative Investment Fund Managers Directive.
With Hong Kong choosing to follow a European regulation model, how has MiFID II, Packaged Retail and Insurance-based Investment Products affected the asset servicing market and maintained parity?
Asia’s brokers or asset managers trading any asset class or providing research to clients based in the EU and UK are impacted by the new second Markets in Financial Instruments Directive regulations and have to comply with the new rules when trading in these two jurisdictions.
The new regulations will also affect Asian trust funds entirely investing into Asian equities but with underlying European investors.
We are yet to see the full impact of MiFID II, however, it offers asset managers and brokers an opportunity to adapt their business models.