Connecting Financial Markets: The Initiatives Shaping Asia’s Integration



Envious of the success arising from Europe’s regulatory convergence – which is allowing Asian investors the mobility to invest in European collective investment schemes (CIS) – Asian governments are working to construct the Asian Regional Funds Passport (ARFP). This initiative will woo back some Asian investors to use locally-based funds instead.

Fund operators in participating economies of the Passport scheme will be able to market approved funds to other member economies with minimal regulatory hurdles. Not only will this keep capital in the region, but it will also provide an additional choice to investors, giving them the ability to better diversify their portfolio to reach their investment objectives.

The ARFP will lead to huge gains for the funds management industry through leveraging the benefits of economies of scale. The internationalisation will mean access to new customers. Therefore, it is expected that the ARFP will lead to a reduction in costs due to the simplification and streamlining of administrative structures. The scope that the funds in the ARFP should achieve throughout Asia will benefit Asia when competing globally due to lowered fees and costs – making funds highly competitive to those outside the region. The Passport will improve liquidity and is also hoped to raise capital to finance the highly needed long-term infrastructure projects that require large-scale investment.

It is not the first initiative to utilise the idea of marketing a designated set of permitted investment funds across borders. The Undertakings for Collective Investment in Transferable Securities (UCITS) vehicle is the investment scheme for funds domiciled in the European Union (EU). UCITS have further matured Europe’s funds management industry and its reputation for predictability and stability.

As a result, the EU has been cashing-in on marketing and selling its UCITS funds to many economies in Asia. “Over the past three years, 40% of all net sales into UCITS funds came from Asia.” In 2011, total net assets in UCITS vehicles stood at €5.63 trillion. In comparison, the capital flow into mutual funds domiciled in Asia was only €6.27 million. UCITS have also grown to be listed in 2012 as the “most popular offshore fund product” in Hong Kong, Japan, Malaysia, Singapore, South Korea, and Chinese Taipei. Whilst UCITS are very popular, the ARFP will “reduce potential settlement risk” for Asian investors which was a problem in the past with the UCITS due to the time zone in which the fund is priced.

Asia, with its fragmented market, is not at all similar to the EU. In comparison, Asia has very low rates of convergence and integration making it "easier to sell UCITS funds in Asia than to sell Hong Kong or Singapore funds". With no overarching body like the EU, APEC is stepping up to champion this harmonisation alongside other economic integration and growth initiatives in the region.

The demographics of Asian markets are diverse. Many are characterised by “a growing middle class and aging population in need of retirement savings products”. Thus, it is timely and necessary that Australia, Japan, Korea, New Zealand, the Philippines, Singapore and Thailand are pushing this opportunity as pilot member countries. Japan’s participation is a particular boost to the ARFP due to the consumer access it will provide with "the estimated $14,000 billion in savings held by Japanese households”.

Progress now depends on these seven economies. They have all signed the Memorandum of Cooperation to ratify the agreement, and have now set aside 18 months to implement domestic legislation and regulation changes to “give effect to the Passport arrangements”. The Passport will be enacted when at least two economies commit to the arrangement.

Expansion of the ARFP initiative is likely. Chinese Taipei, Hong Kong, Indonesia, Malaysia and Vietnam have met with the pilot economies on a biannual basis since 2010 in order “to explore options”. It is an exciting development in regional integration that Indonesia is in the mix because currently “full distribution of offshore funds is not permissible” in Indonesia. This is also the case in China and India. Now that the consultation phase is complete, additional eligible economies can approach to become members. They are also able to propose revisions to the Passport arrangements, making them more likely to join the ARFP in the future.

The ARFP will deepen the capital markets of member economies whose participants will be able to attract finance for growth between each other and, later, possibly further afield. According to APEC, the Passport “could also facilitate funds from the Asia region being marketed in Europe through an Asian/European mutual recognition agreement.”

China and Hong Kong also have further integration plans. Launched on 1 July 2015, the China Hong Kong Mutual Recognition Scheme (CHKMRS) complements China’s 13th Five Year Plan (5YP) and lays “a foundation for the strengthening of financial and regulatory ties towards greater integration of the Asian asset management industry.” Same as the ARFP, the scheme will allow capital mobility and investment in managed funds in respective economies once the funds are qualified. Thus, it remains a question whether Hong Kong and the mainland will want to be officially involved in the ARFP in the future. Or perhaps the plan would be for Hong Kong to join as this would allow Chinese funds international market access, using Hong Kong as a pathway.

There is also the ASEAN Funds Passport. However, the drivers and initial participants of this initiative are already involved in the ARFP (Singapore, Thailand and Malaysia) so it is doubtful that the work will be duplicated.

Cassandra Oaten is the International Trade and Economy Fellow for Young Australians in International Affairs.

This article can be republished with attribution under a Creative Commons Licence. Please email publications@youngausint.org.au with any questions or for more information.

Image credit: Nicolas Lannuzel (Flickr: Creative Commons)

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