Bing Li, who heads the asset management division of Chinese bank ICBC, joined our Luxembourg roundtable to discuss how Luxembourg and China’s asset management industries are connecting with each other. Chaired by Nick Fitzpatrick.
Bing Li (Head of asset management department, ICBC Europe)
Isabelle Lebbe (Partner, Arendt & Medernach)
Victor Chanyin (Partner, KPMG )
Philippe Seyll (Head of investment fund services, Clearstream)
Camille Thommes (Director general, Alfi)
Funds Europe: What is the level of progress in China’s asset management and wealth management industries as they seek to internationalise their businesses? And what have been some of the major milestones in the past two or three years as far as you, the panel, are concerned?
Camille Thommes, Alfi: The Chinese economy has undergone a remarkable transformation over recent years and notably, the government and the state authorities have initiated a series of reforms with a view to further liberalise the domestic Chinese capital markets.
There are definitely some notable reforms – reforms in the fund industry, development of the bond market, new rules governing IPOs, relaxation of foreign shareholders’ participation in domestic companies.
All these efforts taken together, for me, are a clear testimony of the government’s willingness to further internationalise their capital markets. The most prominent development for me over the last two to three years is definitely the introduction of the renminbi qualified foreign institutional investor (RQFII) scheme, back in 2011 and, most recently, the launch of the Hong Kong-Shanghai Stock Connect scheme.
Bing Li, ICBC (Europe): The internationalisation of the asset and wealth management business is part of the globalisation strategy of the Chinese banks. Take ICBC, for example: it started its internationalisation more than 20 years ago and accelerated the speed after the financial crisis in 2008. We have 400 institutions overseas in 40 countries, including four original hubs for private banking and wealth management centres – in Hong Kong, in Singapore, in Europe and in the Middle East. In 2006, we also set up a subsidiary in Luxembourg called ICBC (Luxembourg) and changed the name to ICBC (Europe) in 2011 and opened branches in Paris, Brussels, Milan, Amsterdam and Madrid simultaneously. One year later, we set up another two branches in Barcelona and in Warsaw.
We launched our first RQFII Ucits in the European market before the end of last year, which enabled ICBC to be the first Chinese bank present in the European investment fund industry through its European arms. ICBC (Europe) also received a formal approval from CSFF in relation to the first AIFMD-compliant specialised investment fund before the end of last year, which also enabled ICBC to provide both Ucits and alternative investment fund products on a global basis.
Isabelle Lebbe, Arendt & Medernach: Most striking for me has been the number of clients I advise which are now contemplating investments in China because access is much easier. And the number of Chinese asset managers coming out of China means that now it’s much more diversified in terms of investors.
We have had many enquiries regarding Stock Connect. We have some clients which are already investing in China through Stock Connect, and we have even more of them asking us questions now and looking for information. Many have a wait-and-see approach but it seems quite clear that they will invest in the course of the year.
Victor Chan Yin, KPMG: I think there are two aspects. One is the international asset manager who wants to get exposure to China to offer a broader range of funds to investors. Now, with Stock Connect, there will be opportunities for the global firms to offer exposure to China. And I think investors are interested.
Then there are the Chinese asset managers, like ICBC and many others, looking to internationalise. Traditionally they were doing it through Hong Kong – so they first set up a subsidiary and sell their products within the Asian region. But now we see more and more requests from Chinese asset managers enquiring about opportunities in Luxembourg, because they want also to diversify and target European investors.
Philippe Seyll, Clearstream: I would say progress is still limited if you put it in the context of the size of the asset management market in China. Today, only a small part of this market is trying to internationalise. There are big players like ICBC and Bank of China, but there are a significant number of non-bank asset managers that are still not international at all.
Thommes: I think the potential is enormous. I must confess that over the last, I would say 12 months, there has not been any month where I didn’t, as a trade body, receive a visit from asset managers either based in Hong Kong or directly travelling from mainland China to really get a deeper knowledge about setting up funds and diversifying their business activities. And this is not limited any more to pure asset management houses. I have received visits from securities firms and seen nascent interest from insurance companies – they’re all in a very thorough, well-structured thinking process. But if you see the remarkable evolution over the last couple of years, I think there are tremendous opportunities to serve them out of Luxembourg.
Chan Yin: There are two issues. One is for the Chinese asset managers. If they are looking to diversify and looking for European investors, the biggest problem is distribution, because they don’t know the market in Europe. So there is a need to learn, understand the European market and invest, and it’s not easy to set up a distribution network. The second thing is, in China the returns are very high. To attract Chinese investors to invest in Europe, where the return is lower – it is more difficult.
Thommes: It is clear that distribution is an important aspect in the decision-making process, once they have a clear view on what type of products they want to sell. Some have gone down the route of partnering up with networks here in Europe or with banks that have a regional footprint. But I really sense the ambition of many players to become much more active and to sell their track record and their expertise to a European investor base. I think that’s one of the cards Luxembourg can play, due to the fact that it has that international and global reach when it comes to cross-border distribution.
Funds Europe: Where is demand for China products most concentrated? Is this demand significant in each investor segment such as retail, high net worth and institutional?
Chan Yin: Hong Kong-Shanghai Stock Connect is relatively new but it is currently the easiest way for investment into China, so there’s a lot of interest for this route. But we need to be aware that to go through this route, you can only invest on the Shanghai Stock Exchange. So if you invest in bonds, you still need to get the QFII and RQII quota. I believe that going forward, there will be more and more interest in the Hong Kong-Shanghai Stock Connect, although the QFII and RQFII routes will remain.
Li: In the European market, the demand for Chinese products is closely linked to the compatibility of QFII and RQFII rules with Ucits or AIFMD rules. Before the revision of the QFII rules in December 2012, direct investment of Ucits into the Chinese onshore exchange-traded market was limited to 35% of net asset value. And the Luxembourg regulator only accepted the full investment of Ucits into the Chinese offshore RMB bond market during that time.
Even after the Luxembourg regulator raised the Ucits investment into the Chinese onshore exchange-traded markets from 35% to 100%, after the QFII and RQFII rules were revised in early 2013, market demand for this kind of product was still not significantly improved. Part of the reason was the poor performance of the Chinese equity market during those years and liquidity concerns arising from the repatriation limits.
The turning point came in October 2013 when the Chinese regulator, CSRC, extended the RQFII quota from Hong Kong to Singapore and the UK. And a series of RQFII ETFs investing into the Chinese equity market were promoted. The recent move is to go to the Chinese onshore bond market, especially with the interbank bond market – that’s the reason why the Chinese banks will try to promote the Ucits funds which invest into the interbank bond markets.
In November 2014, the Luxembourg regulator granted authorisation to Luxembourg Ucits funds to trade through the Shanghai-Hong Kong Stock Connect. The enthusiasm quickly gave way to much disappointment, because the trading volume collapsed in the following days and the northbound net trading volume is just less than one quarter of the total RMB300 million quota. This is due to some concerns, like the beneficial ownership of shares through the nominees in the context of the Chinese laws.
According to our experience of distributing Ucits, the major client demand still comes from institutional investors. Considering the QFII, RQFII and Shanghai-Hong Kong Stock Connect is quite new in a European market and the European-based investors are relatively conservative, it is necessary for us to make great efforts to do market education with regards to the Chinese onshore market and RMB internationalisation.
Chan Yin: I think the big difference now with the Stock Connect is that there is a global quota, whereas with QFII and RQFII, it is an individual quota. So it is restricted in terms of asset managers getting access to the quota. But with Shanghai-Hong Kong Stock Connect, as long as you have the approval of the local regulator, any asset manager can go through this route. And I think this will make a big difference in terms of interest for asset managers to offer Chinese products.
Seyll: Previously, the only way to get access to China was to apply for one of these quotas or to buy a local fund. The market was closed to most investors. Now I see it differently, as there are five or six different ways to get into the market. If you are a qualified investor, you can directly access the Chinese market or, via the quota, you can access the stock exchange. In future, with the launch of the mutual recognition of the Hong Kong funds, you can buy a Hong Kong-domiciled fund. Or, if Ucits get access, that is yet another route.
But the elephant in the room is that there will be a positioning of the different domiciles to access the Chinese market.
Thommes: The Chinese authorities go phase by phase, they test the experience and then they move on. So it’s very well-thought through. QFII was originally limited to Hong Kong-based structures and then it was extended to others. With Mutual Fund Recognition, they will give first priority to Hong Kong but, in their willingness to expand and internationalise, they are also considering generalising this process. There have been remarks made in that respect by officials, but we need to see how that evolves and how that develops.
Funds Europe: The volumes of Stock Connect fell in the first few days and this was ostensibly due to Ucits being unable to access Stock Connect. How easy is this to fix? Do we need the Chinese regulator to allow more models of payment?
Thommes: The CSSF has gone through the process at least once and they’ve also authorised Ucits to invest, based on some requirements and conditions and to make sure that the fund is in compliance with European regulations. There are a number of technical and operational issues as well as concerns about ownership and enforcement rights.
We as an association, like the others interested in those developments, have been very active in having an open dialogue with the stakeholders in the region. I’m just about to set up meetings for representatives of the HKSCC [Hong Kong Securities Clearing Company], which will pay a visit to Luxembourg in March. There is, from their part, a clear willingness to meet with European regulators as well as industry players to inform them about the current status and the next phase of development that they are contemplating. So this is all going in the right direction.
Lebbe: It’s true that there have been some regulatory concerns around QFII first, and then RQFII, and now Stock Connect – all those concerns have been addressed. So it’s not on the regulatory side that we have uncertainty, it’s more on the client side, because they don’t know that market sufficiently well. They don’t know the rules sufficiently well and they mention some operational issues around Stock Connect. Maybe the launch of the Hong Kong-Shenzhen Stock Connect might be the start of a broader move on those markets. I think we will see some evolution during this year.
Funds Europe: What are the drivers for China’s asset managers and banks that base themselves in Luxembourg?
Li: ICBC has been here for more than 15 years and there are three major factors in having Luxembourg as the regional hub for our continental European business. Importantly, Luxembourg is the largest recipient of Chinese direct investment into Europe, with a market share of around 28% in 2014, according to the statistics from Luxembourg For Finance. Some of these investments are re-invested into other European countries using the single passport, which is the model adopted by ICBC.
The second factor is that Luxembourg offers an attractive legal framework and business environment, together with the social and political stability, a well-regulated financial industry, a friendly regulatory environment and a skilful, multilingual and multicultural workforce.
Last but not least, the Chinese banks develop the asset management business by leveraging Luxembourg’s dominant role in the European investment fund industry, together with Ucits’ brand name around the world. Luxembourg now is the European investment fund centre and many market players who have a presence in Luxembourg for the cross-border fund distribution use their Luxembourg platform to promote the RMB investment fund.
Chan Yin: I also think Chinese asset managers want to offer the expertise that they already have in China and Hong Kong to the Europeans. I remember talking to one asset manager in Hong Kong and he said his fund is one of his five best in Asia. He wants to attract capital in Europe with the same product and they have teamed up with an asset manager in Europe to offer this product.
Thommes: There has been a collective effort by the authorities here in Luxembourg to further diversify the financial industry and obviously China is an extremely important market. We therefore feel very privileged that we can serve that community. But it’s not an effort that started two years ago. Luxembourg started to have diplomatic ties with the People’s Republic of China more than 40 years ago. There has been a continuous effort to promote Luxembourg, not only for the financial sector but also to develop economic ties in other sectors.
Lebbe: We established a representative office in Hong Kong almost six years ago because of client demand. What we see now is just the development of what started much earlier.
Funds Europe: Bing, what are your thoughts about the service provider community in terms of supporting your business and your expansion ambitions, especially in terms of the Chinese currency?
Li: We have collaborations with many service providers here in Luxembourg, both on the banking side and on the investment fund side, with more focus on those providers who have China expertise or RMB strengths. For custody where we promote our Ucits, it is not very easy for us to find a suitable partner. Usually we have to choose a global custodian in Luxembourg, which has to appoint a local custodian bank in China. But due to the Chinese rules, you know the RQFII holders cannot appoint the local custodian bank from the same group. So that means we cannot choose ICBC in China as the sub-custodian. That makes things more complicated, because there are not too many Luxembourg custodians with close connections with the Chinese local custodians.
Funds Europe: To what extent are Europe’s or China’s regulatory regimes a help or hindrance to their ambitions?
Chan Yin: Things have changed in the last few years. China is trying to open up the capital market but they don’t want to do it in a big bang, they want to do it slowly. So they have set up various schemes. But I think another aspect that we have not touched at all is tax. Recently the tax authorities in China made it clear that from November 17, there is no tax on capital gains on disposals. In the past, it was still uncertain.
Lebbe: In terms of advising asset managers wishing to invest in China, we clearly see those regulatory regimes as helpful. But there is a learning curve, at least on the European regulators’ side, because they need to understand those regulatory developments in China first. We see also a very clear willingness to permit investment in China through regulated structures. The CSSF will always look to solve any regulatory concerns before giving a green light, but we have never found ourselves in front of a closed door. And with that openness and with that discussion, solutions have, so far, always been found.
Thommes: Currently the regulatory regimes are different because Europe is more mature than China, but it is catching up fast. Secondly, there are institutional dialogues happening to exchange practices. This will, over time, bring a convergence of regulatory frameworks. But the most notable thing from our perspective has been the emergence of the Asset Management Association of China. We’ve built very close links with them over time around practices, training and an exchange of information.
Seyll: If you look at the issue of Ucits funds being allowed to invest in Chinese products, it is about using that instrument as a conduit to the Chinese investment market. But in the future, the debate will be more about what products international investors will use to access the Chinese market. Will there be a layer in between Ucits and some of the Chinese schemes? For example, if you look at mutual fund recognition, an investor in China could potentially now invest in a fund domiciled in Hong Kong without any restrictions. Does that mean that if I’m a Ucits fund and I’m mirrored on the Hong Kong fund, I can access all these outbound flows?
I think that’s the debate on both sides, because you’ve got a big pool of investors in China looking at ways to invest externally.
Thommes: A precondition for mutual recognition is to have equivalence in the standards in the rules rather than full alignment of regulatory regimes. These conditions have to be mapped and then assessed by both sides. The second issue is what products might fall under mutual recognition. In the beginning, it may be limited to Hong Kong funds managed and domiciled in Hong Kong and not feeder funds of Ucits. But I don’t necessarily see competition between local products and Ucits products, because I think they are complementary. Hong Kong is still dominated by Ucits products.
Chan Yin: Chinese asset managers know about Ucits but they also have other strategies. As they hear more about Luxembourg, they learn more about other products that are available in Luxembourg and other strategies that are possible. For example, if they are targeting more institutional investors rather than individuals, or the retail market, then they might prefer to set up a Sif [specialised investment fund] rather than a Ucits fund. It’s a learning process.
Li: There are huge opportunities for the Ucits funds industry in terms of accessing the onshore Chinese market. From the perspective of the conservative approach of the Chinese regulators, Ucits is the ideal model. But you also have to consider the strategy of the Chinese government in promoting the RMB internationalisation.
For many years, the Chinese regulator has promoted multiple solutions like QFII, the RQFII, the QDII and the Shanghai-Hong Kong Stock Connect, and there are some local schemes like the QDLP and QFLP. Currently the RQFII scheme still plays a dominant role because the government is trying to encourage the offshore RMB to re-invest in the Chinese onshore market with the purpose of promoting RMB internationalisation.
The RQFII culture has now been extended to the UK, Singapore, France, Germany, Korea, Qatar, Canada, Australia, even recently in Switzerland. Every time the PBOC establishes a clearing arrangement or a currency-swap line with the relevant central banks or monetary authorities, it also gives a RQFII quota to these areas.
Lebbe: And it’s a trend the market seems to have identified already, because together with that increase in Hong Kong-domiciled funds, there is a decrease in the launch of unregulated Cayman-based funds. Cayman Islands funds authorised in Hong Kong have fallen 30% in 2014 against a rise of approximately 20% in Hong Kong-domiciled funds.
Funds Europe: The internationalisation of the renminbi is a major Chinese policy initiative and significant event in global currency markets. Luxembourg has established itself as an offshore renminbi centre; how do you see Luxembourg’s role in this initiative and how is it likely to develop?
Thommes: The fact that the six largest Chinese banks are either present or have made a commitment to set up their European headquarters in Luxembourg is proof of our positioning. Luxembourg is also the largest RMB securities settlement centre outside of China. According to Swift, Luxembourg ranked second as a true offshore RMB centre, behind Singapore and before London.
Seyll: Luxembourg is the largest counterpart to the euro system, with around a 37% share, and I wouldn’t be surprised if Luxembourg increased its share in RMB clearing, which is perhaps surprising for a country that is so small in terms of GDP. But you also have to look at the progression of the renminbi as an international currency and contrast it with the decrease of the dollar. If the renminbi keeps on growing, the importance of the dollar internationally will diminish and the importance of Luxembourg as an international renminbi centre will increase.
Of course, China will still be the main centre, but the markets will need a European centre to relate to, and it is amazing to think that Luxembourg could be a big winner from this expansion.
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