The recent implementation of new regulations for Hong Kong's mutual recognition funds has provided a significant gateway for mainland Chinese investors aiming to diversify their investment portfolios internationally.

Among the pivotal revisions are an escalation of the limit on the sales proportion of Hong Kong mutual recognition funds to overseas investors from 50% to a notable 80%. This change is expected to broaden the investment landscape, allowing various types of funds to be accessed more easily by mainland investorsFurthermore, the easing of restrictions regarding the delegation of investment management responsibilities allows Hong Kong mutual recognition funds to partner with affiliated overseas entities, promoting greater investment opportunities.

Jingxia Dai, a senior analyst at Morningstar China Fund Research Center, emphasizes that the introduction of these reforms will likely lead to a surge in the sales volume of Hong Kong mutual recognition funds within mainland China, thereby better addressing cross-border financial management needs

Additionally, this relaxation of management role delegation is set to expand the array of compatible Hong Kong funds available for registration, offering investors an enriched selection of products spanning various strategies and geographical focuses.

Steady Growth

Mutual recognition funds are collective investment schemes established and publicly marketed under the laws of Hong Kong, which have gained recognition from the China Securities Regulatory Commission for sale in mainland ChinaAs of now, mainland investors commonly have several channels to tap into overseas markets, including Qualified Domestic Institutional Investor (QDII) funds, mutual recognition funds, and the cross-border wealth management schemeAmong these, QDII funds have been the preferred route for many mainland investors, although recent exuberance has led several fund management companies to impose quotas on certain QDII funds, limiting large purchases and regular investment plans.

In addition to QDII, the cross-border wealth management scheme known as "Nanshangtong" targets residents in the nine mainland cities of the Guangdong-Hong Kong-Macao Greater Bay Area, while the scope for participating in Hong Kong mutual recognition funds is far broader, encompassing both individual and institutional investors from the mainland.

Dai offers insights into this disparity, noting that cross-border wealth management rules impose strict criteria concerning investors' identity, investment experience, and financial standing, creating higher barriers to entry

In contrast, the requirements to participate in Hong Kong mutual recognition funds are relatively more liberal; investors merely need to comply with the account opening criteria and risk assessment standards set by relevant sales institutionsAdditionally, Hong Kong mutual recognition funds are fundamentally mutual funds, whereas the cross-border wealth management scheme also incorporates bonds and deposits.

This growing landscape of mutual recognition funds has proven to be a vital complement for mainland investors venturing into cross-border investments, with market sizes steadily increasing since 2023. Data from the State Administration of Foreign Exchange indicates that by October 2024, the cumulative net outflow amount for Hong Kong funds issued in mainland China has reached a remarkable 36.56 billion RMB, marking a dazzling growth rate of 119% compared to the 16.69 billion RMB recorded by the previous October.

According to an investment consultant from a fund company in Guangzhou, the total outflow limit for Hong Kong mutual recognition funds is capped at 300 billion RMB, with the current limits appearing quite accommodating.

Direct data from Morningstar reveals that as of December 2024, there are 39 registered Hong Kong mutual recognition funds (calculated on a merged basis), with 18 being equity funds, 4 hybrid funds, and 17 bond funds

The average return of these 39 funds has exhibited variation throughout 2024, ranging from a peak yield of 32.8% to a trough of -19.37%. Correspondingly, their average returns stand at approximately 11.48% for equity funds, 8.04% for hybrid funds, and 5.36% for bond funds.

Impact of Expansion

Advisors note that while individual Hong Kong mutual recognition funds are not limited by quotas, they are still subject to the stipulation regarding the sales proportion to overseas investorsHistorically, this proportion could not exceed 50%, resulting in some products halting sales to mainland investors when thresholds were reachedNotable cases include the Morgan International Bond Fund and the E-fund (Hong Kong) Select Bond Fund, which suspended sales to mainland investors on designated dates due to these limitations.

Wang Ying, General Manager of Investment and Wealth Management at HSBC China, states that prior to January 1, 2025, the sales ratio for Hong Kong mutual recognition funds in Hong Kong and mainland China stood at 1:1; thereafter, this ratio will transition to 1:4. The revised rules may elevate the available sales quotas for mainland investors

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Significant portions of certain funds in the mainland market currently hover around the 50% cap, hinting that these international bond and Asian bond funds may soon reopen their doors for mainland subscriptions.

The new regulations regarding management role delegation, which now allow these services to be assigned to associated overseas entities within a fund manager's corporate family, are poised to attract increased participation from international asset management firmsCurrently, 21 firms are registered to manage Hong Kong mutual recognition funds, which includes six international asset management institutions, six firms backed by Hong Kong capital, and nine domestic asset managers, with international firms accounting for nearly a third of the total.

Furthermore, Wang notes that over 80% of the Hong Kong mutual recognition funds sold by HSBC are products from international asset management firms

During the consultation phase preceding the new policy announcement, numerous foreign asset managers communicated their readiness to apply for mutual recognition fund registration in mainland China post-reform, signaling a keen interest in establishing a presence and utilizing Hong Kong mutual recognition funds as a pivotal growth avenue within the region.

Wang highlights that as of late 2024, the primary target market for Hong Kong mutual recognition funds primarily rests within the Asian and Greater China regions (approximately 80%), with only a handful directing investments toward global markets or those outside AsiaHowever, with an influx of international asset management teams leading fund management, mainland investors can anticipate a more sophisticated global investment approach, improved customer service, and an expanding range of international-focused Hong Kong mutual recognition fund offerings, enriched by varied investment strategies.

Dai further adds that the easing of restrictions on the sales proportions for overseas investors alongside the relaxation of investment management delegation roles will attract a multitude of quality foreign asset managers into the mainland market, which, in turn, creates opportunities for collaboration between local institutional investors and overseas asset managers—from jointly developing investment products to sharing research resources—ultimately fostering greater internationalization of China's financial market.

Considerations for Investors

The primary sales channels for Hong Kong mutual recognition funds within the mainland are through state-owned banks, foreign banks, and fund companies, along with third-party platforms like Ant Group's fund platform that facilitate purchases for investors.

With this context, what should individual mainland investors be mindful of when looking to invest in Hong Kong mutual recognition funds?

Wang emphasizes that potential investors need to conduct a thorough evaluation of their investment requirements and objectives, financial status, experience, liquidity needs, and risk tolerance before selecting suitable investment products

Moreover, the taxation schemes associated with Hong Kong mutual recognition funds may differ from those of mainland securities investment vehicles, underscoring the importance of reading fund legal documentation carefully or consulting professionals to ensure informed decision-making regarding associated risks.

According to Dai, personal investors should determine their allocation to Hong Kong mutual recognition funds based on a diversified asset allocation strategy, aligning it with their investment goals, risk appetite, and investment horizonFor example, conservative return-seeking investors with low risk tolerance might gravitate toward bond-oriented Hong Kong mutual recognition fundsIn contrast, those aiming for higher returns while accepting some risk may find equity or hybrid funds more suitable.

Dai also highlights that investors ought to scrutinize foundational factors of the funds, such as the experience and capability of the research teams, the effectiveness and stability of the investment process, as well as management competence and fee structures—all critical elements that underpin future performance