In a week of dramatic newsflashes from the China Securities Regulatory Commission (CSRC), last Monday (18 May 2015) it announced measures to address lingering concerns over the issue of beneficial ownership of shares purchased via the Hong Kong-Shanghai Stock Connect program; at the end of the week on Friday (22 May 2015) it jointly announced with the Hong Kong Securities and Futures Commission (SFC) that the two regulators had signed a Memorandum of Regulatory Cooperation on the Mainland-Hong Kong Mutual Recognition of Funds, which will be implemented on 1 July 2015, almost 2.5 years after it was first announced by the SFC. Click here to read the announcement.
This welcome announcement, which has been long awaited, confirmed that the two regulators have agreed to the terms on which the mutual recognition will be implemented, the information that will be exchanged and the regulatory cooperation provided in the cross-border offering of eligible funds. The joint announcement refers to the CSRC's "Provisional Rules for Recognised Hong Kong Funds", which is self-explanatory and should set out the various eligibility requirements to be observed by the managers of funds which are seeking to be recognized in the PRC. However, searches on the CSRC website up to the time of printing did not yield these Provisional Rules and we will have to wait and see the actual details of the requirements.
The SFC simultaneously issued the "Circular on Mutual Recognition of Funds between the Mainland and Hong Kong" (Circular) to set out the eligibility and other requirements which will need to be complied with by the PRC funds seeking to apply for the streamlined authorisation in Hong Kong under this program.
Assuming that the PRC eligibility requirements will mirror the Hong Kong eligibility requirements, we can expect that Hong Kong domiciled funds wishing to be eligible for distribution to retail investors in the PRC must:
- be domiciled, managed and operated in Hong Kong;
- have a manager which is appropriately licensed to operate in Hong Kong;
- have a track record of at least one year;
- have a minimum AUM;
- not invest primarily in the PRC; and
- not have more than 49% of its shares in issue held by local PRC residents.
The Circular sets out the same requirements to be observed by PRC funds except that the minimum AUM is stipulated at RMB 200 million (approximately US$32.3 million), and that the PRC fund should not invest primarily in Hong Kong or have the majority of its shares in issue held by local Hong Kong residents.
As expected, the regulators are playing it safe by only permitting general equity funds, bond, mixed and unlisted index funds and physical index-tracking ETFs to be available at the outset under the program. In time, after any teething issues in the implementation phase are ironed out, and the program grows into its own, the range of fund types that will be permitted may well be expanded.
This announcement last week and the confirmation of an implementation date in 10 weeks' time is a welcome shot in the arm for the financial services industry in this part of the world, which had been looking on with relative envy at the ASEAN1 Framework for Collective Investment Schemes (aka the ASEAN Funds Passport) which went "live" with its pilot scheme involving Singapore, Malaysia and Thailand in August last year.
There are anecdotal reports of up to 100 Hong Kong based funds lining up at the starting blocks and up to 500 PRC based funds waiting to cross over from the other side. If there is more than a little truth in these figures, the annual fireworks display on Hong Kong Establishment Day on 1 July 2015 may be burning bright with good reason!