This year’s headline news is on global markets and their focus on how to fight inflation. Not only is inflation become an issue in emerging markets but also to some developed countries.

Recently, the People’s bank of China raised interest rates during the Lunar New Year holiday, the third times in four months, reflecting the Mainland’s determination to fight inflation. Although China's consumer price index increased in January up to 4.9% from last months 4.6%, it is lower than the market expectation of more than 5%, but whilst the conditions of drought continue in the North of the country, it is expected that inflationary pressures will remain.

Emerging markets in Asian countries have been suffering from the gradual emergence of inflation pressure since last year, mainly due to strong local economic recovery after the financial crisis coupled with global hot money inflow. This year, Thailand and South Korea's Central Bank took the lead in raising interest rates, by 0.25% respectively. In the BRIC countries, India's Central Bank base rate increased from 6.25% to 6.50%, their rates were raised 6 times in the last year.   India’s Central Bank's inflation forecast has increased from the previous 5.5% to 7%. Brazil's central bank interest rate has increased by 0.5 % with interest rates rising to 11.25% as they recorded an inflation rate of 5.91% last year, the highest in the past six years.

In order to suppress the inflation problem, most central banks are using more restrictive monetary policy, in addition to increasing interest rates, some countries such as Brazil, Chile and Taiwan have launched capital control measures to prevent hot money inflows, and quell the potential for asset bubbles to surface.

Recently, the ECB President Jean-Claude Trichet’s comment drew investor’s attention. After an ECB meeting , Trichet claimed the Euro zone is facing a short term inflationary threat. Countries have to be very careful when deal with the threat of commodity prices pushing up inflation and to ensure there are no second-round effects on prices. In fact, the headline inflation in the euro zone jumped to 2.2% in December, and has jumped up to 2.7% recently, that is above the ECB's target. The CPI in United Kingdom in January jumped from 3.7% to 4%, much higher than the target level of the Bank of England’s 2%.

As for the United States, January consumer price index rose by 0.4% and the FED claimed that the inflation is too low and may stay below the Fed's target of 2% through to the end of 2013. However, from the current economic recovery in Europe and America, there should be no room for increasing the interest rates in the short run. In the context of global inflation, tangible assets are highly sought after; investors may wish to pay attention to agricultural products and precious metal investments. In addition, due to the worry of having negative interest rates, and concerns of continuing decline in the purchasing power of money, funds will flow into the stock market seeking for higher returns, stock market will be a good choice at the moment, and especially emerging markets will have a long-term investment return.

Last November HSBC announced the launch of a new MPF scheme by the end of 1st quarter, with the charges ranging from 0.79% to 0.99%. Recently, HSBC also announced that effective from March the management fees of the selected constituent funds including all existing MPF schemes of Hang Seng Index Tracking Fund, MPF Conservative Fund, and Global Bond Fund will be revised. The new management fees will be reduced from the original of 1.25% to 1.5% to 0.79% to 0.99 respectively.

At the beginning of the year, AXA announced the renaming of its two existing mandatory provident fund schemes and actively reduced the management fees to attract new customers. While the other trustees such as Bank of Communication, Bank Consortium Trust Company Ltd and Fidelity are preparing to fight back by studying if there is any room for a fee reduction.

Given that the "Member Choice" is deferred, the price war between the trustees should be slowing down, while HSBC is taking the lead in actively reducing management fees, a price war is like an arrow in the bow. To sum up, many of the trustees are only providing fee reduction on certain funds or new schemes or only to new clients and individual provident funds, instead of to the whole scheme as it was in the past.

However, the cuts have been criticized by the public. For example at HSBC and BOCI-Prudential, their new plan charges are way less than the existing one, and as for AXA, the special fee offer is limited to new customers only and existing customers are not receiving this benefit.

The reason is that Trustees hope to attract new customers through price reductions; on the other hand, full price reduction is too costly. Therefore it only applies to certain schemes or certain funds. According to data from the MPFA, this shows that by the end of 2010, the net asset value of the MPF is HKD 365.4 billion, and using the "Fund expense ratio" (FER) 1.84% as indicator, the estimate charges captured by Trustees is about HKD 6.7 billion.

HSBC and Hang Seng Bank are the most significant players by size in the MPF market as their combined market share is about 32%, if they fully lowered fees from the current 1.85% to 0.99%, they will lose nearly HKD 1 billion in fee income, far higher than the present proposed fee reduction of  about  HKD 200 million.

Whilst most of the members would benefit from the fee reduction, in choosing a mandatory provident fund scheme, it is important not only to focus on the charges, but also to look at the fund performance. For example, a lot of active funds performed much better than HSBC’s Hang Seng index fund in the Hong Kong equity market. Although these other funds charge a higher fee than Hang Seng’s  passive fund they deliver a better return. Therefore, members should compare the schemes comprehensively to fight for better returns.

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