China and Hong Kong will start cross-border sales of funds on July 1, widening access to financial markets and capital in the world’s second-largest economy.
The initial quota will be a total 600 billion yuan ($97 billion), split evenly in each direction, regulators in China and Hong Kong said in a joint statement on Friday. The regulators will establish a way to vet funds, it said. The allocation was bigger than anticipated, according to Invesco Ltd., which oversaw $812 billion globally at the end of April.
Mutual recognition opens a new channel for foreign asset-management firms to tap household savings of around $8 trillion in China, where tight capital controls remain. It also comes six months after the start of a cross-border stock link program allowing mainland investors to buy Hong Kong stocks while giving overseas funds unprecedented access to Shanghai shares.
“I expect to see a balanced two-way flow under the mutual fund recognition program,” said Ken Hu, the Hong Kong-based chief investment officer for Asia-Pacific fixed income at Invesco. “Chinese investors are keen to invest overseas now. One of the reasons is that expectations of yuan appreciation have greatly reduced so there’s more incentives to invest overseas.”
Futures on the Hang Seng China Enterprises Index of mainland stocks traded in Hong Kong gained 1.7 percent at 6:25 p.m. local time, while those for the Hang Seng Index advanced 0.9 percent. The offshore yuan traded at 6.1975 per dollar, little changed from Thursday.
Mutual recognition would enable Chinese asset-management firms to sell their products to offshore investors, while giving their foreign counterparts direct access to the Chinese market. International managers previously tapped China’s growing personal wealth by teaming up with local companies for mutual-fund joint ventures in the country.
“It’s more internationalization,” said Wu Kan, a money manager at Dragon Life Insurance Co. in Shanghai, which oversees about $3.3 billion. “The possible consequence could be that the two markets converge and become closer in terms of investment styles and mentality.”
China funds eligible for the program must be established for more than a year and have a minimum size of 200 million yuan, Hong Kong’s Securities and Futures Commission said in a separate statement. The funds must not primarily invest in Hong Kong’s market, according to the statement.
About 100 Hong Kong funds, and 850 counterparts in China qualify for the program, Julia Leung, the executive director for investment product at the Hong Kong regulator said at a briefing. Together the funds have assets worth 2.3 trillion yuan. The quota can be expanded later, Leung said.
At the initial stage, only general equity funds, bond funds, mixed funds, unlisted index funds and physical index-tracking exchange traded funds would be eligible under the scheme, the regulator said in the statement. The value of units in funds sold to investors in Hong Kong can’t be more than 50 percent of the value of a fund’s total assets, it said.
China has allocated all the 270 billion yuan quotas under the Renminbi Qualified Foreign Institutional Investor program to Hong Kong institutions. It hasn’t given out any new allocations even as the city’s officials have asked for more. Globally, countries including the U.K., Singapore and France have a total of 870 billion yuan of RQFII quotas, according to data compiled by Bloomberg.
“Mutual recognition gives foreign investors more channels to access the Chinese market and hence boosts the cross-border flow of yuan,” Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd., said by phone. “That will facilitate China’s ambition to make the yuan a global reserve currency as it further opens up the capital market. That’s a positive for the yuan.”
Fund providers have been waiting for an official agreement since talks between regulators in China and Hong Kong were made public in December 2012 and January 2013. More than a year has passed since Alexa Lam, the then-deputy chief executive officer of the city’s Securities and Futures Commission, said the program was in its final stretch.
The news comes before the start of a stock exchange link between Shenzhen and Hong Kong that will expand foreign investors’ access to smaller companies. Hong Kong Exchanges & Clearing Ltd. is preparing for the Shenzhen program to begin in the second half of 2015, while the date may be announced by the end of June, Chairman Chow Chung Kong said last month.
“The timing is good because no one expected it to happen before the Shenzhen stock connect,” Tony Chu, a Hong Kong-based money manager for RS Investment Management Co., which oversees more than $20 billion. “It’s easier for foreign investors to access A shares these days so perhaps there’s not much excitement. It’s more interesting for local investors to do mutual recognition because they can buy global equities.”
The Shanghai Composite Index jumped 2.8 percent to its highest close since February 2008, before the news was announced. Hong Kong’s Hang Seng Index rallied 1.7 percent.