Caixin
Dec 01, 2017 04:29 AM
FINANCE

Regulator Tightens Approvals of Hong Kong Stock Investment Funds

The China Securities Regulatory Commission has slowed approvals since June of new mutual funds planning to invest in the Hong Kong market. Photo: IC
The China Securities Regulatory Commission has slowed approvals since June of new mutual funds planning to invest in the Hong Kong market. Photo: IC

China’s securities regulator has tightened approval of mutual funds focusing on the Hong Kong equity market amid rapid growth of southbound capital flows that have pushed up the Hang Seng Index to a decade high.

The China Securities Regulatory Commission has slowed approvals since June of new mutual funds planning to invest in the Hong Kong market, several sources told Caixin. The commission also stiffened requirements on fund marketing and management and ordered existing funds to comply with the new rules within six months. Funds failing to do so will be suspended, the sources said.

The regulator’s move reflects rising risk concerns after Hong Kong’s stock market surged in recent months, partly fueled by increasing capital flows from mainland investors via programs linking the Hong Kong market with bourses in Shanghai and Shenzhen. Last week, the benchmark Hang Seng index climbed above the 30,000-point mark for the first time in 10 years.

According to disclosures at the CSRC’s official website, the commission hasn’t approved any new Hong Kong stock investment fund since July 14.

Under the new rules, a mutual fund can name and market itself as a Hong Kong stock investment fund only when 80% of its portfolio is invested in Hong Kong-listed shares. Other mutual funds can invest no more than 50% of their stock market portfolio in the Hong Kong market.

Hong Kong stock investment funds must be run by at least two professionals with more than two years of asset management experience in the Hong Kong market. Mutual funds are also ordered to better disclose their underlying assets in the Hong Kong market and potential investment risks.

A mutual fund manager said the new requirements are strict and make it difficult for funds to hire qualified managers. “Fund managers who meet the requirements usually ask for over 4 million yuan for annual pay,” the manager said.

Mainland investors are drawn to Hong Kong equities by better returns and the convenience offered by the stock-connect programs. Thresholds for retail investors to buy into mutual funds focusing on Hong Kong stocks usually stand at only 1,000 yuan ($151).

Trading through the two stock-connection programs has contributed about 15% to total daily transactions in Hong Kong, according to Andrew Swan, BlackRock's head of Asian and global emerging market equities.

But Morgan Stanley predicted a limited impact on the Hong Kong market from the tightened rules because mutual funds account for less than 5.7% of total southbound investments in the Hong Kong market.

Laura Luo, Head of Hong Kong China Equities at Baring Asset Management, said despite the tightened measures, southbound capital flows into the Hong Kong market will continue growing next year as mainland companies such as insurers still have strong demand to allocate their portfolios overseas.

As of Nov. 30, capital invested in Hong Kong equities through the Shanghai-Hong Kong Stock Connect program, launched in April 2014, totaled HK$584 billion, while investments via the Shenzhen-Hong Kong Stock Connect program launched late last year reached HK$695.8 billion. Meanwhile, capital flowing from Hong Kong to mainland bourses via the two channels totaled HK$226.8 billion to Shanghai and HK$400 billion to Shenzhen.

Contact reporter Han Wei (weihan@caixin.com)

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