China and Hong Kong Special Administrative Region (HKSAR) signed the 10th supplement to the Closer Economic Partnership Arrangement (CEPA X), at the end of August which covers measures to foster tighter cooperation in the financial services sector. What will it mean for the Hong Kong financial services sector? Will it change the fundamentals of Hong Kong’s asset management industry for better or worse?
CEPA, the arrangement between the mainland and Hong Kong, is essentially a free trade agreement that offers Hong Kong products, companies and residents preferential access to the mainland market. The measures in this latest agreement will come into force at the beginning of 2014.
Hong Kong financial secretary John Tsang and Chinese vice minister of commerce Gao Yan signed the 10th supplement to agreement at the end of August. Tsang say among the supplements made since the signing of CEPA in 2003, Supplement X contains the greatest number of measures.
Some 28 business sectors have already been partly liberalised for Hong Kong exporters and services providers, including (among many others) construction, real estate, market research, banking, securities, transportation, freight forwarding, and trademarks. Companies in some 18 service industries enjoy varying degrees of improved access. In some areas, the concessions go further than China’s commitments under its accession agreements to the World Trade Organisation (WTO). Under various agreements, provided appropriate rules of origin conditions are met, Hong Kong goods in some 374 separate tariff codes can be exportable to the mainland free of duty.
Specifically, Supplement X to CEPA provides covers some 73 separate areas of financial and manufacturing services of which some 65 involve measures liberalising the operation of financial services and eight others which “strengthen co-operation in areas of finance and facilitate trade and investment “ between mainland China and Hong Kong. One of the more important elements in this 10th round is that the mainland has agreed to assess the value of mutual recognition of fund products between the mainland and Hong Kong.
Under this latest agreement the mainland has agreed to study the efficacy of introducing mutual recognition of fund products between the mainland and Hong Kong. Up to now the impact of CEPA on the Hong Kong securities industry has been relatively minor.
Under the terms of this latest agreement Qualified Hong Kong-funded financial institutions will be allowed to set up joint venture fund management companies in the mainland in accordance with local requirements. The shareholding percentage of these Hong Kong-funded institutions will now be able to exceed 50%. Hong Kong-funded financial institutions which satisfy the requirements for establishing foreign-invested securities companies will be also allowed to set up one full-licensed joint venture securities company each in Shanghai, Guangdong Province and Shenzhen in accordance with relevant mainland requirements.
Moreover, Hong Kong-funded securities companies will be allowed to make reference to all the securities assets being managed by the respective group when applying for Qualified Foreign Institutional Investor (QFII) status. “We highly welcome the latest initiatives under CEPA X,” says Timothy Tse, chief executive at Value Partners, the Hong Kong based investment firm. “This marks another step of liberalisation in the mainland’s financial services sector. As China quickens its pace in financial reforms, investors can be the end beneficiaries and may enjoy a better offering of products and services,” he adds.
Tse points out the potential size of a free market between the mainland and Hong Kong. “The average savings rate in China exceeds 50% of GDP, equivalent to around $4trn a year. For the mainland’s mutual fund industry, the total assets in funds, trust company products and insurance savings vehicles have grown to exceed $2trn in size.”
To that should be added Hong Kong’s already strong asset management industry. According to the latest survey released by the Hong Kong Securities and Futures Commission, the combined fund management business in Hong Kong rebounded significantly to a record high of HKD12.6trn (about $1.62trn) as of the end of 2012, representing year-on-year growth of 39.3%. “The much-anticipated mutual recognition scheme of investment funds is considered to be a game changer,” says Tse. “Hong Kong’s fund products have a strong appeal and will likely catch the eyes of mainland investors, a huge potential client base given the size of the China market and the high savings rate on the mainland.”
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