East moving West: the Chinese dimension
Many Asian economies are growing, and there are huge opportunities in the local financial markets. Not surprisingly, Asian asset managers have plans to expand in their region and beyond. Michael Ferguson, Partner and Asset Management Leader at Ernst & Young Luxembourg, is moderating the "East moving West" panel at the ALFI-NICSA conference in Luxembourg. In an interview with LFF, he speaks about these expansion plans, the role of Hong Kong and communication between regulators.
LFF: What do you think about Asian fund markets in general?
MF: Asia is very diverse. You have the large, mature markets, domestically focused, such as Japan and Australia. Then you have the outward looking hubs such as Hong Kong and Singapore; lastly, there are the emerging giants of India and mainland China. If you look at the fact that these economies are growing significantly and there is obviously a growing middle class, you can see that there is going to be a need to save for future pensions, health and education. We believe that the fund industry will be the basis for those future savings.
LFF: International asset managers have different levels of engagement in Asia. How about the local asset managers? Do you think that they, too, are eager to expand in their own region?
MF: Asian asset managers are aware of the huge potential in their local markets but they lack diversity of product and some sophisticated know-how. They have deep knowledge of the local Asian markets, but once you leave Asia, the depth and breadth of knowledge is somewhat more limited. As a result, we have seen several local Chinese, Indian and Singaporean asset managers set up products in places like Luxembourg, with the view of bringing their local Asian expertise to Europe and trying then to sell that product here in Europe and beyond – in Latin America and the Middle East.
LFF: Given of the challenges of increasing cross border sales in Asia Pacific, what distribution strategies do you expect will emerge?
MF: We see a number of different approaches. We see the banks continuing to play a role; we also see the arrival of cross-border focused platforms, similar to the independent platforms you see here in Europe. When you think about the cross-border challenges, you see what I call bilateral arrangements between individual countries more and more. For example, Hong Kong allows Singapore funds and vice versa. We also see what I would describe as UCITS-type local regulation in Asia, meaning that they will take the best of the different UCITS platforms here in Europe and create something similar in Asia. An Asian UCITS would be desirable for local Asian markets. However, given the fact that they are so diverse, it is going to take a very long time for that to become a reality.
LFF: How do these asset managers develop their access to the Chinese markets?
MF: At the moment, there is a focus on fixed-income with a lot of investment in the so-called RMB bonds, which have experienced quite big growth over the last two years. The other areas that are growing in importance are exchange-traded funds (ETFs) and real estate; Chinese people, in particular, like to invest in real estate. There is obviously some concern around a potential bubble in that sector, but it is still attracting amazing amounts of money. The other area that is growing significantly is private equity. In many cases, they are joint ventures between local Chinese asset managers and European or American players. Asian asset managers are bringing the local connectivity and market knowledge; the foreign asset managers are bringing more technical know-how and the infrastructure needed in order to reach this, broader and deeper market.
LFF: From an asset management perspective, what role does Hong Kong play as a bridge between mainland China and the outside world?
MF: In my experience, you don’t really see local Chinese asset managers come directly from China to Europe to invest. It is more what I would call a "stepping-stone approach". First they go to Hong Kong, get regulated with the SFC and begin operating there. They become familiar with a more international, Western-focused world, build up a certain level of know-how and then they use Hong Kong and their locally regulated entities to look outwards. First, they expand into the broader Asian markets such as Singapore and Taiwan; and particularly, over the last few years, they have been using Hong Kong as their launching pad into Western Europe. That is the pattern that I have seen them adopt when they come to places like Luxembourg.
LFF: What role can Luxembourg and Europe play in order to attract Chinese investors and Chinese financial institutions?
MF: We need to be conscious, when changing regulations around the fund industry, of what the impact will be not only on the European Union but also on regions like Asia. So there needs to be greater communication with the Asian regulators on some of the regulatory changes that have occurred in the fund industry over recent years. But you will not be successful by trying to do things from here. You have to be physically present in Asia, and not only once a year. If you look at the agenda of the Luxembourg Investment Fund Association (ALFI), you will see that we have taken some steps in that respect with many, many road trips.
We engaged with the regulators and the main actors and we opened up an office. We need to continue to focus on and build on that relationship and enhance it. We also want to make sure that, given everything that has happened since the beginning of the crisis in 2008, investor protection is at the forefront. We also need to be conscious about cost. We can have regulatory changes, but we must make sure that they have some real added value – that it is not regulation for the sake of regulation. CW