FSDC releases recommendations to establish HK as funds domicile

19 November 2013   Category: News, Asia, China, Global, Hong Kong   By Asia Asset Management

The Financial Services Development Council (FSDC), a newly established think tank of the Hong Kong SAR Government, released research papers on November 18 examining how best to expedite growth of the city’s offshore RMB businesses and financial industry.

The paper delivers 21 recommendations regarding the offshore RMB business. For example, it suggests the government should enhance co-operations with the FSDC and the HKMA, as well as other financial industry associations, to better promote globally the potential of the Hong Kong offshore RMB market for third-party financing.

In terms of promoting reforms on the Mainland, the FSDC suggests implementing a pilot scheme within the Qianhai-Shenzhen-Hong Kong Modern Service Industry Co-operation Zone on the back of QDII3 fund allocations.

“In the initial stage, the pilot scheme could consider providing a total of 50 billion RMB (US$7.9 billion) and $5 billion in QDII3 quotas to Qianhai, allowing the Authority of the Qianhai-Shenzhen-Hong Kong Modern Service Industry Co-operation Zone to allocate the quotas to individual institutions through transparent procedures and criteria. This special quota arrangement under the QDII3 arrangement would enhance RMB liquidity in Hong Kong.”

In order to overcome key challenges and develop Hong Kong as an regional hub to domicile investment funds, the FSDC says it is critical that the government establish a framework for open-ended investment companies (OEIC) and create a clear and favourable tax environment for funds: “If the government could agree on the mutual recognition of funds with the mainland regulators and allow for collective investment funds from Hong Kong and the mainland to be sold to investors in both markets, it would be a game changer that could greatly increase the number of funds domiciled in Hong Kong, and help improve the asset management industry in the Mainland.”

“Currently, all open‐ended funds domiciled in Hong Kong are only allowed in the form of unit trusts, which are less flexible and more complex than OEICs, the preferred investment vehicle for many fund managers. As a direct result, many funds choose to domicile in other jurisdictions where OEICs can be set up, rather than in Hong Kong. To establish Hong Kong as a centre to domicile funds, in addition to being a sales and distribution centre, we believe the government should review the existing legal, tax, and regulatory framework to create attractive conditions for setting up OEICs in Hong Kong compared to other global investment fund centres, while at the same time ensuring an equally high level of investor protection and governance,” the paper says.