09.16.2015
By Shanny Basar

Euroclear Opens Path to China Domiciled Funds

International fund managers will find it easier to participate in an initiative for mutual recognition of funds between Mainland China and Hong Kong after Euroclear Bank opened an account with Hong Kong’s central securities depositary.

Euroclear Bank, the Brussels-based international central securities depositary, has opened an account with Hong Kong’s central securities depositary which enables Euroclear to participate in the Mainland-Hong Kong mutual recognition of funds initiative (MRF). This regulatory agreement allows certain Hong Kong-domiciled funds to be sold to retail investors in China and vice versa.

Jan Dehn, head of research at emerging markets fund manager Ashmore, said in an email to Markets Media that the Euroclear initiative will make it more attractive for international fund managers to participate in MRF. “This helps to ease trade settlement and is part of broader process of opening and integrating Chinese markets,” he added.

As Chinese markets become deeper and more liquid, Dehn expects the range of arbitrage opportunities will widen for investors.

Dehn said growth prospects for MRF in the next three to five years are enormous. “The MRF links domestic investors in China with HK funds that can access global markets,” he added. “In other words, the MRF is part of China capital account liberalisation.”

Ivan Nicora, chief executive of Hong Kong branch, regional head, Asia-Pacific at Euroclear, said in a statement: “This initiative reinforces our Asia growth strategy as we continue to support the development of the MRF as we endeavour to facilitate an international link to this market. We expect demand to grow significantly in the next three to five years.”

Ernst & Young said in a report that following the successful launch of Shanghai-Hong Kong Stock Connect last November, the MRF is seen as another breakthrough in the liberalization of the Mainland’s financial market.

“It offers more investment options for both the Mainland and Hong Kong investors to access unparalleled capital markets,” added Ernest & Young. “The MRF could potentially introduce around 850 Mainland funds into the Hong Kong market and around 100 Hong Kong funds into the Mainland market.”

The qualifying 100 Hong Kong funds have about RMB 300bn ($48.4bn) in total assets and the 850 Mainland funds have around RMB 2 trillion ($322.7bn).

Ernst & Young said the MRF is expected to be exclusive in Hong Kong for a period of time before it is rolled out to other locations. “This period of exclusivity could see more global managers shifting its focus to set up in Hong Kong to be closer to the Mainland market and will ultimately strengthen Hong Kong’s position as a wealth management center,” added the report.

However this week the Bank for International Settlements warned in its latest quarterly report that investors are increasingly focused on growing vulnerabilities in emerging market economies and particularly China, following the falls in Chinese stock markets. The BIS said the benchmark Shanghai Shenzhen CSI 300 Index lost almost one-third of its value between 12 June and 8 July.

“The Chinese authorities’ decision in August to allow the renminbi to depreciate against the dollar gave markets a renewed jolt,” said the BIS. “The move intensified investors’ concerns about growth prospects for China, emerging market economies more broadly and, ultimately, the global economy.”

Dehn argued that there will be no long-term impact from the recent downturn in the Chinese stock markets. He said: “China is proceeding on its path of reform and the latest volatility is just that, volatility.”

In June Ashmore announced the launch of the Ashmore All Chinese Equity Fund allowing investors opportunities in both the onshore and offshore China equity markets.

 

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