Regulators announce HK-China mutual recognition

Hong Kong-China mutual recognition is to be launched on July 1 this year, laying the foundation for the two sides to develop a fund regulatory standard, securities regulators in the two markets  announced.

The Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) jointly released a statement late on Friday (May 22) to introduce the long-awaited scheme. The initial investment quota will be Rmb300 billion ($48.3 billion) for northbound and southbound fund flows each way, it was confirmed.

SFC chairman Carlson Tong highlighted the fact that the move would promote the development of Asia's asset management industry - a first reference to the scheme's regional potential, perhaps, if it is extended to other jurisdictions on a bilateral basis, as some in the industry are forecasting.

At the end of last year, about 100 Hong Kong domiciled funds were eligible for inclusion, while about 850 Chinese mutual funds were potentially eligible as at the end of the first quarter.

The regulators noted the scheme would allow eligible mainland and Hong Kong funds to be distributed in each other’s market through a streamlined vetting process. It comes after they signed a memorandum of regulatory cooperation on China-Hong Kong mutual recognition of funds.

"The mutual recognition of funds initiative is a major breakthrough in the opening up of the mainland’s funds market to offshore funds," said the SFC's Tong. "It will also open up a new frontier for the mainland and Hong Kong asset management industries and make available a wider selection of fund products to investors in both markets.

"More importantly, this initiative will lay the foundation for the CSRC and SFC to jointly develop a fund regulatory standard, promoting the integration and development of the Asian asset management industry.”

Further details of the launch were unveiled by SFC chief executive Ashley Alder, chairman Tong and Julia Leung, executive director of the investment products division, at a press conference on Friday evening.

Initially, only the following products will be allowed to trade under mutual recognition: general equity funds, bond funds, mixed funds, unlisted index funds and physical index-tracking exchange traded funds.

Mainland funds applying for SFC authorisation must meet the following eligibility requirements:

• The fund is established and managed and operates in accordance with mainland laws and regulations and its constitutive documents;
• The fund is a publicly offered securities investment fund registered with the CSRC under the mainland’s Securities Investment Fund Law;
• The fund must have been established for more than one year;
• The fund must have a minimum fund size of not less than Rmb200 million or its equivalent in a different currency;
• The fund must not primarily invest in the Hong Kong market;
• The 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.

Mutual recognition was first announced by Alexa Lam, the former deputy CEO of the SFC, in January 2013. Since then there has been continuing speculation about when the scheme would be launched.

Lam stepped down from the SFC in February this year, after being widely credited as the key architect of the scheme.