23 Feb 2017
Fund Management Industry in Hong Kong
- Hong Kong is widely recognised as a leading fund management centre in Asia with a large concentration of international fund managers.
- As of end-2015, Hong Kong’s combined fund management business amounted to US$2,230 billion, while assets under management under private banking totalled US$470 billion.
- As of end-December 2016, there were 2,779 SFC-authorised collective investment schemes, including 2,196 unit trusts and mutual funds, 300 investment-linked assurance schemes, 257 pension/MPF-related funds and 26 other investment schemes.
- The ETF market in Hong Kong has demonstrated remarkable growth in recent years. As of end-2016, there were 133 ETFs listed in Hong Kong.
- In December 2016, the Securities and Futures Commission (SFC) and the Swiss Financial Market Supervisory Authority signed a Memorandum of Understanding (MoU) on Switzerland-Hong Kong Mutual Recognition of Funds and Asset Managers. Under the MoU, eligible Swiss and Hong Kong public funds can be distributed in each other’s market through a streamlined vetting process.
- In January 2017, 54 cross-border funds were approved under Mutual Recognition of Funds (MRF) scheme, which consisted of 6 Hong Kong funds and 48 Chinese mainland funds.
- In December 2016, the “Shenzhen-Hong Kong Stock Connect” was officially launched, providing an alternative route for Hong Kong fund management companies to invest in one of the mainland’s bourses.
Range of Services
The fund management business comprises assets management, advisory business and other private banking activities. According to a survey released by the Securities and Futures Commission (SFC) in July 2016, the combined fund management business in Hong Kong hit a record high of US$2,230 billion as of end-2015, down 1.6% year-on-year (YoY). The combined fund management business comprised asset management business (71% share), private banking business of registered institutions (21%), fund advisory business of licensed corporations (7%) and REITs (1%).
Hong Kong is a major regional fund management centre with a large concentration of international fund managers in Asia. According to the SFC survey, around 68.5% of the investment funds (excluding REITs) were sourced from outside Hong Kong in 2015.
Hong Kong's fund management industry has developed a strong expertise of investing in Asia, in particular the Chinese mainland. Such expertise is vital to Hong Kong's appeal for attracting funds for management. According to the SFC survey, in 2015, 71.5% of the assets managed in Hong Kong were invested in the Asia-Pacific, amounting to HK$4,881 billion, with HK$3,427 billion in Hong Kong and the Chinese mainland, HK$420 billion in Japan and HK$1,034 billion in the rest of the Asia-Pacific respectively.
There is an increasing trend of mainland-related financial institutions establishing operations in Hong Kong. As of 2015, mainland-related groups of companies had established a total of 270 licensed corporations or registered institutions in Hong Kong, according to the SFC. The number of funds managed by these companies had risen from 253 in 2014 to 283 in 2015.
As of end-2016, there were 2,779 SFC-authorised collective investment schemes, including 2,196 unit trusts and mutual funds, 300 investment-linked assurance schemes, 257 pension/MPF-related funds and 26 other investment schemes.
Industry Development and Market Outlook
- ETFs listed in Hong Kong cover a wide range of geographical locations, including Hong Kong, the Chinese mainland, Japan, South Korea, Russia, India and other emerging markets. Types of assets include equity, Asian bonds, gold and commodity futures index, etc. The depth and breadth of investment funds managed in Hong Kong has increased notably in recent years. A broad range of investment products, ranging from low-risk bonds or money market funds to more sophisticated REITs and hedge funds products, are available in Hong Kong.
- As of end-2016, there were 157 listed unit trusts/mutual funds on the Main Board of the Hong Kong Exchange (HKEx), up from 147 a year ago. Among them, there were 133 ETFs, 12 leveraged and inverse products (L&I) and 11 REITs.
- The turnover of ETFs in Hong Kong in 2016 amounted to HK$1 trillion, accounting for 6% of the HKEx’s main board total. As of end-December 2016, Hong Kong’s ETF market capitalisation amounted to HK$306 billion.
- In December 2015, the first batch of cross-border funds under the Mainland and Hong Kong Mutual Recognition of Funds (MRF) scheme was approved, consisting of three Hong Kong funds and four mainland funds. The introduction of MRF products allows mainland investors to broaden their offshore investment spectrum via investment fund products from Hong Kong. MRF implementation gives funds managers a greater incentive to set up more Hong Kong-domiciled funds targeting mainland investors. This has come on top of the continued expansion of RMB investment products in Hong Kong. In January 2017, 54 cross-border funds were approved under the Mutual Recognition of Funds (MRF) scheme, comprising 6 Hong Kong funds and 48 Chinese mainland funds.
- In December 2016, the SFC and the Swiss Financial Market Supervisory Authority signed an MoU on Switzerland-Hong Kong Mutual Recognition of Funds and Asset Managers. Under the MoU, allow eligible Swiss and Hong Kong public funds can be distributed in each other’s market through a streamlined vetting process.
- In keeping with industry development, the SFC continues to work with the Hong Kong Government in developing a legal and regulatory framework for open-ended fund companies, so as to provide an additional choice for the market and attract more funds to domicile in Hong Kong.
Qualified Domestic Institutional Investor (QDII)
In April 2006, the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued rules to allow qualified commercial banks to raise RMB funds from individuals and institutions to invest in overseas financial instruments. Hong Kong was the first market which mainland residents were allowed to invest via qualified mainland financial institutions. The QDII scheme is conducive to an orderly outflow of mainland capital.
Six lenders on the mainland were then allowed to provide such service to their customers, including Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), Bank of Communications and the mainland branches of Hong Kong and Shanghai Banking Corporation (HSBC) and Bank of East Asia. QDII has since then been extended from banks to insurance companies, fund companies, and securities companies.
As of end-January 2017, SAFE had granted QDII quota amounting to US$90 billion, with US$13.8 billion assigned to 30 banks, US$37.6 billion to 48 fund management companies and securities firms, US$30.9 billion to 40 insurance companies, and US$7.8 billion to 14 trustees.
The amount of mainland assets managed in Hong Kong sourced from QDII grew by 16% year-on-year to HK$145 billion in 2015, of which 54% were invested in the Asia-Pacific.
RMB Qualified Foreign Institutional Investor (RQFII)
The Central government introduced the RMB Qualified Foreign Institutional Investor (RQFII) scheme in the second half of 2011, under which RQFIIs are allowed to raise funds in Hong Kong and invest in the securities market on the Chinese mainland. The scheme has been expanding in terms of quota and participation from overseas countries. As of end-January 2017, the accumulated RQFII quota was RMB530 billion, with Hong Kong accounting for some 51% of the total or RMB270 billion.
China's World Trade Organisation (WTO) Accession
The full potential of Hong Kong's fund management industry cannot be realised without the Chinese mainland market. China has a growing demand for fund management expertise to manage its massive savings pool and rapidly expanding retirement funds. Given its proximity to the mainland, Hong Kong has played a key role in sharing management skills and talents in the development of the mainland's fund management industry. With China having phased in all WTO commitments, overseas fund houses can now hold up to 49% of equity stakes in a fund management company on the mainland.
Under China’s 12th Five-year Plan, it is stated that the mainland will support Hong Kong as an offshore RMB centre and fund management centre. Hong Kong’s financial services offer will be reinforced by an expected rise in dual-listing of stocks and ETF. Riding on the expanded RMB trade settlement scheme, Hong Kong has succeeded in expanding its offer of RMB-denominated financial products and services, including trade finance, RMB stocks, RMB bonds and other related products and services.
Stock Market Connection with the Chinese Mainland
To improve the opening and healthy development of capital markets on the mainland and in Hong Kong, Premier Li Keqiang unveiled in April 2014 the Central government’s plan to deepen China's capital markets through linking the stock exchanges in Shanghai and Hong Kong (that is, SSE and HKEx). This “Shanghai-Hong Kong Stock Connect”, allowing cross trading of eligible stocks between the two stock exchanges, was officially launched on 17 November 2014, with initial daily quotas of RMB 13 billion for northbound trading of SSE listed securities and RMB 10.5 billion for southbound trade of HKEx-listed securities. Hong Kong fund management companies are eligible to participate in the Stock Connect, thereby providing an alternative route for them to invest in the mainland equity market apart from the scheme of RMB Qualified Foreign Institutional Investor (RQFII).
Similarly, the “Shenzhen-Hong Kong Stock Connect” was launched on 5 December 2016, with daily quotas of RMB 13 billion for northbound trade covering 881 stocks, and of RMB10.5 billion for southbound trade covering 417 stocks (versus 318 stocks under the southbound coverage of SH-HK Connect).