The role of HK in the development of the China fund management industry

Presented by Au King Lun, Chairman of HKIFA at the

American Chamber of Commerce Luncheon

Hong Kong Investment Funds Association （ July 7, 2004 ）

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Discussion topics

An overview of the China fund management industry

The role of Hong Kong in the development of the China fund management industry

How to further foster the relationships between the Mainland and Hong Kong

HKIFA

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An overview of the China fund management industry

HKIFA

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Regulatory framework

1997: Interim Measures for the Administration of Securities Investment Funds

2002: Trial Measures for Open-ended Securities Investment Funds

2002: Rules for the Establishment of Fund Management Companies with Foreign Investment

2004: Securities Investment Funds Law

HKIFA

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Number of fund management companies

As at the end of May 2004: 38 fund management

companies in China

HKIFA

No. of fund management companies

610 10

1521

3338

0

10

20

30

40

1998 1999 2000 2001 2002 2003 2004

Source: CSRC

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Asset size

Closed-end funds : 87.7 billion yuan (US$10.7 billion)

Open-ended funds: 197.2 billion yuan (US$24 billion)

Source: CSRC (*As at May 31, 2004) HKIFA

Asset Size

0

50

100

150

200

250

1998 1999 2000 2001 2002 2003 2004*

Bill

ion

Yua

n

Closed-endOpen-ended

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Investor growth

130740

2350

3530

0

1000

2000

3000

4000

2001 2002 2003 2004(3/31)

Number of beneficiary accounts in open-ended funds ('000)

HKIFA(From various industry sources)

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Investment products

Based on % of FUM of the 80 open-ended funds:

Equity, 77%

Moneymarket, 5%

Bond, 18%

HKIFA(From various industry sources)

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Joint ventures

As at the end of May 2004, there are over 10 joint ventures. (Source: CSRC)

More JVs are in the pipeline.

WTO: maximum shareholding of foreign partner:

– current: 33%; – three years after accession (i.e. by the

end of 2004), raised to 49%.

HKIFA

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QFIIs

Allow foreign financial institutions to invest in Chinese Renminbi denominated instruments

(e.g. equities, bonds and mutual funds)

Introduced in 2003, there are now 11 approved QFIIs (US$1.76 billion). Another dozen applications being reviewed by the Chinese authorities.

Success of QFIIs pave way for QDIIs

HKIFA

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QDIIs

Opportunities for the fund managementindustry:

National Social Security Fund

Insurance companies

Others

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National Social Security Fund (“NSSF”)

NSSF: 135 billion yuan (US$16.5 billion)

Six domestic fund managers have been appointed to manage part of the portfolio in December 2002.

The second batch will be appointed soon.

The NSSF has obtained approval in principle to invest overseas.

HKIFASource: BOC (As of May 2004)

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Insurance companies Assets of insurance companies : over 1,000 billion yuan (US$

122 billion)

Estimated that the insurance industry grows at about 30% each year.

Need for diversification to provide better match for liabilities.

April 2004: Rules have been promulgated allowing insurance companies to set up asset management companies to manage insurance assets.

Authorities have in principle approved plans for insurers to invest overseas.

HKIFASource: CIRC (As of May 2004)

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Other potential

Rapid economic growth and increase in household income

– GDP reached US$1.4 trillion (2003)

– Per capita GDP exceeded US$1,000

Large bank deposit base– Bank savings (individuals): 11.2 trillion yuan (US$1.

4 trillion) (As at the end of April 2004)

– Forex deposits (individuals & enterprises): US$147.4 billion (As at the end of April 2004)

– Bank deposits rate below 2% vs. CPI of over 4%

HKIFASource: National Bureau of Statistics of China

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Other potential (cont’d)

SOEs reforms Pensions reforms:

• Ageing population

• Low investment returns from pension assets: need for diversification

• Corporate supplemental pensions : 30 billion yuan (US$3.7 billion); expect to increase 50-80 billion yuan each year and reach 500 billion yuan (US$61 billion) by 2010.

HKIFASource: MOLSS (As of June 2004)

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The role of HK in the development of the

China fund management industry

HKIFA

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Role of Hong Kong

1. As a capital formation centre for China

2. As a key source in providing technical

expertise

HKIFA

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1. As a capital formation centre for China

Raise funds for investment in the capital market

s in China (e.g. QFIIs)

Help SOEs and private enterprises to list in HK

HKIFA

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1. As a capital formation centre for China (cont’d) Over the past ten years, US$100 billion have been

raised by Mainland-related enterprises in Hong Kong

86% of Mainland Chinese companies listed overseas are listed in HK

HK leads in fund raising capability, international status, market efficiency, availability of professional services, regulatory framework and quality of investors.

HKIFASource: HKEx

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2. As a key source in providing technical expertise

Investment:

– International investment management expertise

– Risk management

Marketing and distribution:

– Channel management

– Product development and innovation

– Investor education and financial planning

– Client servicing HKIFA

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2. As a key source in providing technical expertise (cont’d)

Backoffice and support function:

– Information technology know-how

– Personnel management: recruitment and training

Regulatory:

– Regulatory framework

– Compliance

– Corporate governance HKIFA

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How to further foster the relationships between the Mainland and Hong Kong HKIFA’s proposals:

1) To allow HKSFC-authorized funds to be used as vehicles for QDII purposes

- initial stage: HK-domiciled funds only - later: extend to all HKSFC-authorized funds

2) To allow HKSFC-authorized funds to be marketed in the Mainland

- Develop a special share class, e.g. C-class, such that subscriptions and redemptions are all carried out in the Mainland. A cost-effective investment option to FX deposits holders in the Mainland

3) To continue maintaining dialogue with the counterparts in China (via the HKIFA China Subcommittee)

HKIFA

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Thank you Q & A

HKIFA