Mainland Hong Kong Mutual Recognition of Funds Expansion of Cross-Border Investment Opportunities Southbound Northbound The Mainland-Hong Kong Mutual Recognition of Funds does not only increase the cross-border activities for both the Mainland and Hong Kong s fund markets, it also provides a more diversified fund selection to investors in both markets. Hong Kong investors may directly get access to the Mainland financial market via this new channel and invest in different types of Recognized Mainland Funds to further diversify their investment portfolios. Introduction to the Mainland Hong Kong Mutual Recognition of Funds ( MRF ) Initiative What is the MRF initiative? The Securities and Futures Commission of Hong Kong ( SFC ) and the China Securities Regulatory Commission ( CSRC ) signed a Memorandum of Regulatory Cooperation on 22 May 2015 to provide a framework for the MRF initiative to allow eligible Mainland and Hong Kong funds to be distributed in each other s market. The MRF initiative was implemented on 1 July 2015. The MRF initiative is a major breakthrough in opening up both the Hong Kong and Mainland s fund markets, and it provides a wider selection of fund products to investors in both markets. 1
What are the key fund eligibility requirements for obtaining the MRF authorization 1? Recognized Mainland Funds to be offered in Hong Kong (Southbound) Recognized Hong Kong Funds to be offered in Mainland China (Northbound) Fund Types Equity funds, bond funds, mixed funds, unlisted index funds and physical index-tracking exchange traded funds Fund History Established for more than 1 year 2 Fund Size Not less than RMB 200 million or its equivalent in a different currency Place of Establishment and Management Mainland China Hong Kong Fund Eligibility Requirements Underlying Investments Not primarily invest in the Hong Kong market 3 Not primarily invest in the Mainland market Regulatory Authority of the Home Jurisdiction Registered with the CSRC Authorized by the SFC Regulatory Authority of the Host Jurisdiction Authorized by the SFC Registered with the CSRC Distribution Scale Value of shares/units in the fund sold to investors in Hong Kong shall not be more than 50% of the value of the fund s total assets Value of shares/units in the fund sold to investors in Mainland China shall not be more than 50% of the value of the fund s total assets 1 The information presented in the table is only a brief highlight of the key fund eligibility requirements based on the following sources and please refer to the sources for details: a) Circular on Mutual Recognition of Funds between the Mainland and Hong Kong dated 22 May 2015 issued by the SFC http://www.sfc.hk/edistributionweb/gateway/en/circular/doc?refno=15ec29 b) Q&A on Mainland-Hong Kong Mutual Recognition of Funds responded by CSRC Spokesperson dated 22 May 2015 issued by the CSRC (only available in Chinese version) http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201505/t20150522_277638.html c) Frequently Asked Questions (FAQs) on Mainland-Hong Kong Mutual Recognition of Funds dated 7 July 2015 issued by the SFC http://www.sfc.hk/web/en/files/pcip/faq/mrf_faqs_150707.pdf d) Mutual Recognition of Funds: Implications for Investors issued by the Investor Education Centre http://www.hkiec.hk/web/en/hottopics/mutual_recognition_of_funds.html 2 For Recognized Hong Kong Funds to be offered in Mainland China, the 1-year period is calculated from the day on which the fund received SFC authorization. 3 For Recognized Mainland Funds to be offered in Hong Kong, the fund should not invest more than 20% of its assets in the Hong Kong market. 2
How will Hong Kong Investors benefit from the MRF Initiative? Some Recognized Mainland Funds have thematic investment ideas that are not commonly found in the Hong Kong s fund market and such funds will be made available to Hong Kong investors. The MRF initiative provides a new channel for Hong Kong investors to access the Mainland financial market directly through investing in the Recognized Mainland Funds. Availability of Different Thematic Investment Ideas Direct Access to the Mainland Financial Market MRF Diversification A New Way to Invest in RMB Investors in Hong Kong will have more choices of fund products and may invest in different types of Recognized Mainland Funds to further diversify their investment portfolios. Hong Kong customers RMB deposits have reached RMB 972.4 billion as of 31 May 2015 4. As some Recognized Mainland Funds are denominated in RMB, it offers Hong Kong investors a new way to invest their RMB. 4 Section 3.3.2 of the Monthly Statistical Bulletin (August 2015 - Issue No. 252) issued by the Hong Kong Monetary Authority http://www.hkma.gov.hk/eng/market-data-and-statistics/monthly-statistical-bulletin/table.shtml 3
MRF - A New Channel to invest in the Mainland Financial Market Following a series of cross-border investment initiatives to open up the Mainland financial market to Hong Kong investors, including investing in Qualified Foreign Institutional Investors ( QFII ) funds and RMB Qualified Foreign Institutional Investors ( RQFII ) funds and investing via the Northbound Trading under the Shanghai-Hong Kong Stock Connect ( Stock Connect ), the MRF initiative is another major breakthrough in promoting financial market development and cooperation between Mainland and Hong Kong. Comparison of different cross-border investment initiatives: QFII Funds RQFII Funds Northbound Trading under the Stock Connect new Recognized Mainland Funds under the MRF (Southbound) Arrangement Launch Date First QFII Fund authorized by SFC in 2006 5 First RQFII Fund authorized by SFC in 2012 6 Trading under the Stock Connect started on 17 November 2014 7 The MRF initiative was implemented on 1 July 2015 8 Settlement Currency USD RMB RMB No specific currency Forms of Investment Investment Funds Investment Funds Securities Investment Funds Northbound aggregate Quota Restrictions Total quotas granted to QFIIs are around USD 76.6 billion as of 29 July 2015 9 Total quotas granted to RQFIIs are around RMB 399.4 billion as of 29 July 2015 10 quota is set at RMB 300 billion whilst Northbound daily quota is set at RMB 13 billion, both on a net buy basis 7 Initial investment quota is RMB 300 billion 8 5 The Outlook for the Fund Management Industry in Hong Kong Speech at Hong Kong Investment Funds Association Luncheon by Martin Wheatley, SFC s Chief Executive Officer, on 1 February 2007 http://www.sfc.hk/web/doc/en/speeches/speeches/07/mw_20070201_hkifa.pdf 6 A New Frontier for RMB Investment Products and Asset Management Business Speech at Hong Kong Securities and Investment Institute by Alexa Lam, SFC s Deputy Chief Executive Officer, on 23 January 2013 http://www.sfc.hk/web/en/files/er/pdf/alexa_20130123.pdf 7 Investor Newsletter Shanghai-Hong Kong Stock Connect (Launch Issue) dated 21 November 2014 issued by Hong Kong Exchanges and Clearing Limited http://www.hkex.com.hk/eng/market/sec_tradinfra/chinaconnect/documents/shanghai-hong%20kong%20stock%20connect%20newsletter% 20-%20Launch%20Issue_En.pdf 8 Joint Announcement of China Securities Regulatory Commission and Securities and Futures Commission dated 22 May 2015 issued by the SFC http://www.sfc.hk/edistributionweb/gateway/en/news-and-announcements/news/doc?refno=15pr52 9 QFII Investment Quota Approval Status Report as of 29 July 2015 issued by State Administration of Foreign Exchange (only available in Chinese version) http://www.safe.gov.cn/resources/wcmpages//wps/wcm/connect/safe_web_store/safe_web/glxx/hgjwjgtzzmd/node_glxx_jwjg_store/d6dc3100 4dc4fb3ea76aa7a46e1b18c9/ 10 RQFII Investment Quota Approval Status Report as of 29 July2015 issued by State Administration of Foreign Exchange (only available in Chinese version) http://www.safe.gov.cn/resources/wcmpages//wps/wcm/connect/safe_web_store/safe_web/glxx/hgjwjgtzzmd/node_glxx_jwjg_store/10830c80 49dc6f179d02bfed8ff4845d/ 4
Important Risk Warnings / Notes Investors should note that all investments involve risks (including the possibility of loss of the capital invested), prices of fund units may go up as well as down and past performance information presented is not indicative of future performance. Investors should read the relevant fund s offering documents (including the full text of the risk factors stated therein (in particular those associated with investments in emerging markets for funds investing in emerging markets)) in detail before making any investment decision. Risks Associated with the MRF Arrangement Quota restrictions: The Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme is subject to an overall quota restriction. Subscription of units in the Fund may be suspended at any time if such quota is used up. Failure to meet eligibility requirements: If a Recognized Mainland Fund ceases to meet any of the eligibility requirements under the MRF, it may not be allowed to accept new subscriptions. In the worst scenario, the SFC may even withdraw its authorization for the Fund to be publicly offered in Hong Kong for breach of eligibility requirements. There is no assurance that the Fund can satisfy these requirements on a continuous basis. Mainland tax risk: The tax arrangement on Mainland tax relating to investment in a Recognized Mainland Fund is currently unclear. Investors may be subject to uncertainties in the Mainland tax liabilities. Different market practices: Market practices in the Mainland and Hong Kong may be different. In addition, operational arrangements of Recognized Mainland Funds and other public funds offered in Hong Kong may be different in certain ways. For example, a Recognized Mainland Fund may only accept subscriptions or redemption of units on a day when both Mainland and Hong Kong markets are open, or it may have different cut-off times or dealing day arrangements versus other Hong Kong funds. Investors should ensure that they understand these differences and their implications. Concentration Risk / Mainland Market Risk The Fund invests primarily in securities related to the Mainland market and may be subject to additional concentration risk. Compared to investment in other markets, investing in the Mainland may give rise to different risks including political, policy, tax, economic, foreign exchange, legal, regulatory and liquidity risks. RMB Currency and Conversion Risks RMB is currently not freely convertible and is subject to exchange controls and restrictions. Non-RMB based investors are exposed to foreign exchange risk and there is no guarantee that the value of RMB against the investors base currencies (for example HKD) will not depreciate. Any depreciation of RMB could adversely affect the value of investor s investment in the Fund. Investors may not receive RMB upon redemption of investments and/or dividend payment or such payment may be delayed due to the exchange controls and restrictions applicable to RMB. Disclaimer This document is issued by Hang Seng Investment Management Limited, which is a wholly-owned subsidiary of Hang Seng Bank Limited, on 13 August 2015. Some of the information contained in this document is based on external sources which Hang Seng Investment Management Limited reasonably believes are reliable. On the information provided by such external sources, Hang Seng Investment Management Limited reasonably believes that such information is accurate and complete. The contents of this document have not been reviewed by the SFC. This document is for reference only. This document does not constitute, nor is it intended to be, nor should it be construed as any professional advice, offer or solicitation to deal in any of the investment(s) mentioned herein. This document does not constitute any representation or recommendation or assessment as to whether or not any of the investment(s) mentioned herein is/are suitable or applicable to any persons and thus shall not be held responsible in this regard. Investors should make investment decision(s) based on his/her own investment objectives, financial status, risk tolerance abilities and specific needs; and if necessary, should seek advice from independent professional advisors. This document does not constitute any professional advice and should not be relied upon in that regard. All investments involve risks (including the possibility of loss of the capital invested), prices of investment products may go up as well as down and past performance information presented is not indicative of future performance. Investors should read the relevant investment product s offering documents (including the full text of the risk factors stated therein) in detail before making any investment decision. MRF EDU 08/15 (DM) 5