July 07, 2015

Michael Chan: China-Hong Kong Mutual Recognition of Funds scheme offers great opportunities, but fund managers will likely wait and see

Michael Chan

On May 22nd, the China Securities Regulatory Commission and Hong Kong’s Securities and Futures Commission signed the Memorandum of Regulatory Cooperation on Mutual Recognition of Funds (MRF) between Mainland China and Hong Kong. The MRF is a mutual fund recognition scheme which went live on July 1st allowing funds domiciled in Hong Kong and China to be sold in each other's markets.  

The scheme is yet another important milestone towards opening-up China’s capital markets and a great opportunity for the international asset management industry to tap into China’s retail investor market, as well as giving Chinese asset managers access to international investors. Leading up to the introduction of mutual recognition, a number of fund managers have been re-domiciling funds and setting up Hong Kong funds in anticipation, with the number of HK-domiciled funds doubling in the last three years. However, investor sentiment overall to the arrival of the new scheme has been somewhat lukewarm.

Despite the great opportunities the China retail investor market has to offer, expectation is there will not be a rush of interest straight away and that many fund managers will instead take a more wait and see approach. A number of regulatory and operational requirements still need to be clarified in order to facilitate and attract large scale fund distribution under the MRF scheme. Along with these factors, investment sentiment among Chinese retail investors and their knowledge of mutual funds will decide whether the MRF scheme can and will reach its full potential.