China, Hong Kong in ’Final Stretch’ on Fund Mutual Recognition

Hong Kong is in the “final stretch” of talks with China on mutual recognition of funds, which will pave the way for cross-border sales, said Alexa Lam, deputy chief executive officer at the city’s Securities and Futures Commission.

Both sides reached broad agreement on the scope of the project, including what funds will qualify, eligibility requirements of the managers, disclosure and investor protection, Lam said at a financial forum in Hong Kong today.

The deal would open a new channel for international companies to access more than 45.6 trillion yuan ($7.5 trillion) of household savings in China, which retains tight capital controls. The country’s mutual-fund industry may more than double to 6 trillion yuan by 2015, Shanghai-based consulting firm Z-Ben Advisors estimated.

“It is the biggest opportunity for fund companies in this market,” said Stewart Aldcroft, Hong Kong-based chief executive officer in the Asia-Pacific region at CitiTrust Ltd. in December. “There’s very significant pent-up demand, particularly among the medium- and higher-net-worth individuals, to be able to access foreign markets.” CitiTrust is a unit of Citigroup Inc. that provides trustee services to funds in Hong Kong.

China’s savings rate of more than 50 percent of gross domestic product is the highest among major economies, according to a June 2010 Bank for International Settlements report.

Asia Regulators

Regulators in Asia have been working on three separate cross-border fund sale initiatives to keep wealth within the region, and help develop and retain control over the local financial industry in the face of mounting European and U.S. market access rules, according to a Citigroup report last year.

Talks between the China Securities Regulatory Commission and the Hong Kong regulator were made public by officials in December 2012 and January 2013.

Hong Kong is one of the region’s largest fund importers with vehicles domiciled in offshore centers such as Cayman Islands, Luxembourg and Dublin accounting for almost 95 percent of sales, according to the Citigroup report.

International managers previously tapped China’s growing personal wealth by teaming up with local companies for mutual-fund joint ventures in the country. More than half of the 89 mutual fund companies in China have foreign stakeholders, according to the commission’s data.

The deal under negotiation will also allow Hong Kong investors to buy Chinese mutual funds.

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