China funds approved to buy HK shares on Stock Connect

Chinese mutual funds have been given approval to invest in Hong Kong-listed shares through Stock Connect, as part of attempts to liberalise its markets. 

The move has also been viewed as a bid to revive interest in the cross-border trading link, which has been underperforming since its launch last year. 

However the new initiative's effectiveness has been questioned, given the meteoric rise of mainland stocks over the past year compared to the relative disappointment of shares in Hong Kong. 

Effective since last Friday when guidelines were published by the China Securities and Regulatory Commission (CSRC), the new rules remove the need for Chinese funds to hold a qualified domestic institutional investor (QDII) licence in order to invest in stocks listed on Hong Kong’s bourse. 

“Funds form an important base for our institutional investors within our country’s securities market," said a spokesperson for the CSRC. "Allowing funds to be involved in the Shanghai-Hong Kong Stock Connect will help product and service innovations, allow for Stock Connect to gradually develop, and develop market connectivity between the two markets.”  

Fund managers and custodians looking to be involved in the scheme will need to strengthen controls and improve risk management systems, while also making preparations for personnel, business processes and technical systems, the CSRC said. 

Under the guidelines, funds that have already been approved to invest in Hong Kong listed-stocks before Friday’s announcement can do so under its original route or use Stock Connect. 

Meanwhile, funds that have not been approved to buy Hong Kong-listed stocks would need to gain approval from the fund’s shareholders. Disclosure on investment stocks, strategies and risks must be stated in the fund’s contract if given the go-ahead. 

The news has been seen as an attempt by Chinese authorities to boost the stagnant Stock Connect programme, which market commentators have consistently seen as under-utilised since its launch last November. 

So far, investors in China buying into Hong Kong stocks have only used 12.2% of the Rmb250 billion ($40.2 billion) quota. Much of the southbound trade is from Chinese retail investors using the scheme. 

But some are already questioning how effective the new initiative will be in boosting trades, given Shanghai A shares' meteoric rise of 80% over the past year, against the Hong Kong Hang Seng index's 10% increase, noted Charles Salvador, investment solutions director at consultancy Z-Ben Advisors. 

Additionally, Chinese investors who want to invest in Hong Kong are in any case already likely to have an offshore account in the city. 

Meanwhile northbound trade, which is relatively more active , has seen 41% of the Rmb300 billion quota filled so far. Yet this is still far from Hong Kong stock exchange's original prediction that it would be able to fill in the quota by the first quarter of this year. 

Part of the reason for the lack of foreign investors, most noticeably fund managers, buying Shanghai-listed stocks revolves around the issue of beneficial ownership and what their legal status would mean in an enforcement scenario, although the issue is close to being resolved. 

Despite existing problems, AsianInvestor has reported that at least two or three Luxembourg-domiciled Ucits funds have already gained approval from its regulator to use Stock Connect to buy into Shanghai A shares. 

The upcoming batch will join Investec Asset Management, which revealed in February that it was launching the world’s first Ucits funds that use the scheme.