BNP Paribas Securities Services
Asia Pacific countries need to work together to make the most of foreign investment, according to Lawrence Au of BNP Paribas
There is a lot of buzz around the Asia Pacific region at the moment. What are the most important trends from your point of view?
There is no doubt that there is a lot going on in the Asia Pacific region, and that is largely driven by China—the internationalisation of the renminbi has been a driver of a lot of different initiatives. China is opening up its market for investment, the Hong Kong-Shanghai Stock Connect was launched last year and the renminbi qualified foreign institutional investor (RQFII) programme is expanding, not only allowing equities or balanced funds but also fixed income-only funds.
At the same time, the whole region is trying to get traction from international investors, and there are several passporting arrangements happening simultaneously. One is the Association of Southeast Asian Nations (ASEAN) funds passport, which covers jurisdictions such as Singapore, Malaysia and Thailand. Then there is a bigger, more regional agreement, the Asia Region Funds Passport (ARFP), which is currently in the consultation stages, and would involve Australia, New Zealand, South Korea, Singapore, the Philippines, Thailand and, most recent signatory, Japan.
Finally, if you look at fund flows, Europe is coming out of a very bad time financially, and there is a fairly common acknowledgement that, although it is going to resume growth, it will be very low percentage growth. The US has long been expecting to come out of its low growth cycle, but all of the economic data is still very ambiguous and there are still some fundamental issues with the economy.
By comparison, China is probably going to have 6 or 6.5 percent growth this year, even taking in to account this summer’s issues with the stock market. This is still impressive growth. The market has just been too used to double-digits.
China is still an emerging market—do you think it needs to have a wobble or two in order to fully mature?
I think the market adjustment since the summer is healthy, and it perhaps gives a more balanced view of China. It is growing a lot, but some of the infrastructures are less developed than they should be.
Every major Asian market has been through a crisis or two before becoming healthy. Then, afterwards, they tried to understand what the issues were and corrected them, creating an environment more attractive for institutional investors, as opposed to being dominated by retail investors. They would create much clearer rules and create more hedging tools in the market, improving public confidence so that gradually the stock market would become more balanced.
Hong Kong closed its market completely for four days in the October 1987 market crisis because of huge turmoil, and at that time it was largely a retail market, just as China is today. Now, Hong Kong is about 70 percent institutional investors and 30 percent retail, and it is much more healthy.
In the long run, China will implement reforms that will allow it to progress to a more mature, reliable and transparent infrastructure.
The ARFP is a partnership between very different markets. How will this work in practice?
Culturally, economically and geographically, many of these countries have no connections at all—it’s just an assembly of countries that have a similar interest. One major drive for the ARFP is that these markets are tired of UCITS being driven by the European agenda rather than looking at what is necessary to drive growth in Asia.
Another driver is that they’re trying to get some traction from the fund flows besides the interest around China. These countries feel that they need to do something to make it easier for foreign investors, in order to take advantage of the interest in the region.
Currently, however, this is still in the memorandum of understanding period, and there is one key point that, if not addressed, will make it very difficult for the passport to be successful. That is the issue of tax.
In some countries, such as South Korea and Australia, local investors can purchase funds launched by local fund managers and pay a relatively low capital gains tax rate. If that fund is sold by a foreign fund manager, however, the capital gains tax rate is much higher.
This issue hasn’t been addressed in the most recent version of the understanding, and because of this, Singapore, which was an early signatory of the ARFP when it was initially discussed, has refused to sign until the issue is addressed.
Singapore is generally a very open economy, but if Singapore agrees to this passporting regime, it would allow foreign funds to be sold to its investors, while Singaporean fund managers trying to sell funds in Australia, for example, will be hit with a punitive tax rate. It’s not a fair arrangement. The Monetary Authority of Singapore has issued a statement explaining its stance on this and is really forcing the issue.
Are these issues being addressed? Will we see a passport soon?
It’s hard to say, but now the problems have been put on the table, they will surely attract a lot more attention, and hopefully the tax issue will be resolved. I don’t see how the passport can be successful if this is not addressed.
The other big issue is that, at least at the moment, the ARFP is not operating the same way as the UCITS framework, where if a fund is approved in the home domicile it can be sold to other countries without further approval.
In the cases of the ASEAN passport and the ARFP, the home country and the host country distributing the fund have to give their approval. They are both still some way off from real single passports.
Obviously, Europe is very different because it is driven by the EU, which serves to harmonise a lot of these things. There is no Asian union, so participating countries are, understandably, not willing to completely open up to each other. It is a big job, but if it is successful, it will be a big step for these Asian markets.
