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China Fund News reporter Fang Li and Lu Huijing

Stimulated by the bull markets in Japan, India and the United States, investors' recognition of the concept of global allocation is increasing day by day. However, QDII quotas are in short supply, and northbound mutual recognition funds are gradually attracting market attention.

In fact, as early as July 1, 2015, the mutual recognition of funds between the mainland and Hong Kong officially started. The number of northbound mutual recognition funds reached 39, involving 20 Hong Kong licensed asset management institutions, of which 38 have been publicly sold in the mainland. As of the end of May, the cumulative net remittance amount of northbound mutual recognition funds reached 27.32 billion yuan, an increase of nearly 10 billion yuan from 17.436 billion yuan at the end of last year, showing the strength of funds' pursuit of such products.

It is worth mentioning that on June 14, the China Securities Regulatory Commission announced that it had recently revised the "Interim Provisions on the Administration of Mutual Recognition of Funds in Hong Kong" to further optimize the mutual recognition arrangement between the mainland and Hong Kong, and publicly solicited opinions from the public. Before the new regulations were implemented, various institutions made sufficient preparations, not only actively holding road shows and providing investment education, but also planning investment and product layouts in advance.

The number of northbound mutual recognition funds increased by 10 billion this year

On May 22, 2015, the China Securities Regulatory Commission and the Hong Kong Securities Regulatory Commission signed a memorandum of regulatory cooperation on the mutual recognition of funds between the Mainland and Hong Kong, and at the same time issued the "Interim Provisions on the Management of Mutual Recognition of Funds in Hong Kong", which was officially implemented on July 1, 2015.

According to statistics, as of the end of March 2024, the China Securities Regulatory Commission has registered 39 northbound mutual recognition funds, involving 20 Hong Kong licensed asset management institutions, 38 of which have been publicly sold in the Mainland; while there are 44 southbound mutual recognition funds, involving 23 Mainland fund managers.

As mainland investors pay more attention to mutual recognition funds, mutual recognition funds, as a powerful supplement to cross-border investment tools, have seen a steady growth in market size since 2023. According to data from the State Administration of Foreign Exchange, as of the end of May, the cumulative net remittance amount of northbound mutual recognition funds reached 27.32 billion yuan, an increase of nearly 10 billion yuan from 17.436 billion yuan at the end of last year, reaching 9.884 billion yuan, an increase of 56.69%. The net subscription in the first quarter was close to 10 billion, about 40% of the current stock. By the end of May 2023, this number was only 14.87 billion yuan, which means that in the past year, the scale of northbound mutual recognition funds has increased by 12.45 billion yuan.

"The popularity of mutual recognition funds has rebounded significantly this year, with significant growth in customer attention, sales channel recognition, and sales enthusiasm. But specifically, the popularity of mutual recognition funds in different asset categories varies greatly, and US dollar asset products seem to be more popular among investors." said Li Xuanjin, general manager of HSBC Jinxin Fund.

He Xian, deputy chief executive of CSOP, also said that in the past year, mutual recognition funds have received more market attention, especially the product strategies that are less covered by QDII funds, which have attracted many investors to inquire. In her opinion, there are many reasons for the increase in sales and market attention of mutual recognition funds: first, policy support; second, the current investors' demand for diversified asset allocation is increasing, and mutual recognition funds just provide a convenient and efficient way of cross-border investment.

However, Liu Dong, head of Tianhong Fund's international business department, said that the market attention to mutual recognition funds is increasing, but they are still niche products and investors have limited understanding of them. Compared with QDII and other domestic funds, mutual recognition funds are not paid attention to by most investors, and their managers, investment markets, investment logic, market outlook, subscription and redemption processes, etc. all need to go through a process of re-understanding and cognition by investors.

Optimizing mutual recognition of funds arrangements

Expand your space

It is worth mentioning that the regulatory authorities previously planned to moderately relax the restrictions on the proportion of mutual recognition fund sales abroad and further optimize the mutual recognition arrangement of funds. This new regulation has stimulated the enthusiasm of various institutions and they are actively making preparations before implementation.

"As regulators further optimize the mutual recognition fund arrangements, investors' enthusiasm for mutual recognition funds has also been ignited. Currently, HSBC Jinxin will carry out popular science and investment education around the mutual recognition fund products that customers focus on, to help investors better understand mutual recognition funds and the markets and assets behind them, so that investors can make better investment decisions." Li Xuanjin introduced.

Li Xuanjin also said that in the past one or two months, HSBC Jinxin has jointly carried out a number of online and offline roadshows with sales channels and third-party platforms. In addition, it has also released relevant investment education content through social media platforms such as official WeChat accounts and video accounts.

Zhang Xin, director of international business at Morgan Asset Management (China), also said that the revised opinions of the new regulations reflect that the regulatory authorities have made precise policy optimizations to the pain points encountered in the market's development over the years. "We are full of expectations for the development prospects of mutual recognition funds. The company team is actively selecting fund strategies that meet the requirements of the new regulations and can be included in the scope of Hong Kong mutual recognition funds. We look forward to bringing more refreshing overseas strategies to market investors after the new regulations."

Ji Lu, from the marketing department of Value Partners, a foreign-funded fund company, also said that the new regulations are expected to significantly increase the domestic saleable scale of mutual recognition funds after they are implemented, providing new business growth opportunities for related foreign-funded fund companies. Currently, Value Partners is working with mainland agents to strengthen the expansion of retail channels and institutional client layout, hoping to better seize this market opportunity.

The Hong Kong subsidiary is also gearing up for the event. Hexian said that if the new mutual recognition fund rules can be implemented, it will undoubtedly bring new development opportunities to the fund industry. For CSOP and other foreign fund companies, this means a larger market space and more investment opportunities.

"CSOP is actively preparing in many ways to meet greater challenges: First, we are optimizing our internal management system and technological capabilities to respond quickly to policy changes and improve operational efficiency and compliance capabilities; second, we are strengthening cooperation with our parent company and other overseas asset management institutions within the group to enhance global asset allocation capabilities and provide better investment management services; third, we are studying products suitable for the mutual recognition mechanism and do not rule out the launch of more funds that meet the requirements of the new regulations; fourth, we will strengthen market promotion and investor education, introduce new products and new policies to investors, and help them better understand and utilize new investment opportunities." Hexian said.

These people all believe that once the new mutual recognition rules are implemented, it will not only provide a more relaxed development environment for fund companies, but also bring more diversified investment options to domestic investors, enhance market vitality, and increase the global attractiveness of China's financial market.

Three major advantages of mutual recognition funds

Also need to pay attention to the risks

Obviously, in the context of tight QDII quotas, northbound mutual recognition funds have attracted investors' attention due to their diversified investments, convenience and efficiency, but risks also need to be noted when making arrangements.

Talking about the advantages of mutual recognition funds, Liu Dong said that the Hong Kong mutual recognition funds currently sold in the mainland have several characteristics: first, the investment market and asset types are more diversified; second, the investment philosophy is more focused on the long term, and the theme and direction of fund investment rarely change; third, most of them invest in Hong Kong or the Asia-Pacific market, and there are fewer funds that can cover other developed or emerging markets.

Hexian talked about the difference between mutual recognition funds and QDII funds. One is the difference in investment quota: QDII funds are subject to the QDII quota limit approved by the State Administration of Foreign Exchange, while a single Hong Kong mutual recognition fund has no QDII limit and is only subject to the sales ratio limit between the two places.

Second, the investment methods and types are different: mutual recognition funds are sold through the mutual recognition mechanism between the mainland and Hong Kong, and the types include stock, bond and hybrid types, with active management as the main type. QDII fund investment is invested in multiple markets around the world through QDII quotas, among which the scale and number of passive index-type QDII-ETFs have clearly prevailed in recent years.

The third is the difference in fee structure: the average management fee of mutual recognition funds is slightly higher, but there is no redemption fee, and the subscription fees vary; the subscription and redemption fees of QDII funds follow the average level of the mainland market. In addition, some other possible "implicit" transaction fees of QDII-ETFs, such as the recent trading premium risk in the exchange, will affect the actual returns of investors in the exchange.

Hexian also said that the northbound mutual recognition funds have attracted more and more investors with their professional management team, international investment vision, diversified investment targets and high-quality fund management platform. However, Hexian also emphasized that when investing in such funds, you need to pay attention to foreign exchange risks and the problem of low transaction settlement efficiency. Because it involves cross-border information and asset delivery and settlement, the subscription and redemption cycle of mutual recognition funds is relatively long, and redemption is generally at least T+5 working days.

"Mutual recognition funds are subject to Hong Kong's financial supervision because their parent funds are registered in Hong Kong. There are differences between them and QDII funds in the types of shares that can be selected, the information disclosure mechanism and the location of the investment team." Zhang Xin also said that for investors who hold RMB to purchase mutual recognition funds, most mutual recognition funds provide two options: RMB hedging and RMB non-hedging. RMB hedging shares can effectively reduce the impact of foreign exchange market fluctuations on fund assets. In addition, most mutual recognition funds provide the option of regular dividends and cumulative shares. However, the dividends of the profit part of the mutual recognition fund are subject to a certain percentage of dividend tax. In terms of information disclosure, mutual recognition funds provide monthly fund reports to disclose the fund's asset holdings to investors.

Li Xuanjin suggested that when investors invest in mutual recognition funds, they should first understand the markets and assets invested by the mutual recognition funds to ensure that the investment direction is consistent with their own needs; secondly, overseas market fluctuations are usually large, so investors must understand the past risk-return characteristics of the invested products and whether they are in line with their own risk preferences; finally, the share setting of mutual recognition funds will be more complicated than that of QDII funds. For example, cumulative shares, hedging shares, and dividend shares will be set. Investors need to understand the characteristics and differences of each share and select the share category that meets their own financial management needs.

Editor: Captain

Audit: Wooden Fish

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