BENCHMARK’s China funds correspondent William Kwok explains the dynamics of new fund issues in Hong Kong and the impact of the Shanghai-Hong Kong through train.
With all the talk of ‘mutual recognition’ and the growth of locally domiciled mutual funds, it is important to remember that 60% of the total Hong Kong fund products are still registered in Luxembourg. The European tax haven has been the centre of ‘offshore’ fund establishment since the early 1990s, when the single market for so-called UCITS funds, was created across Europe. Hong Kong’s SFC recognized that Luxembourg’s regulation was sufficient to ensure compliance with local investor protection rules. This local recognition for Luxembourg UCITS funds has allowed fund managers, mainly from the EU, to offer their funds in Hong Kong and other parts of Asia, notably Singapore.
There are over 120 ETFs in Hong Kong, the second largest market in Asia Pacific behind Japan. Over half of them are related to the China market. The average daily turnover of the HKEX’s ETF market is about HK$4 billion. Typically, the top 5 performing stocks in these ETFs are related to China or China A shares.
This concentration of assets in China-related funds does not offer the investor a wide choice. However some new fund groups are emerging with a slightly different proposition. In November 2014, BMO ( Bank of Montreal ) launched 3 products in Hong Kong; one US$ Bond related, another Hong Kong bank related and a third focusing on Asia High Yield, excluding China.
The Impact of Stock Connect
As for the much talked about Shanghai-Hong Kong Stock Connect project, we have seen that the volume of trading after the initial burst of activity, has not come close to exceeding the daily volume limits. This was especially true on the Southbound route, where mainland investors have yet to show much interest in Hong Kong shares. This can be expected to change over time, since the majority of mainland investors are individuals who are currently unfamiliar with the Hong Kong market and its trading mechanism.
We expect that more new products based on SH-HK connection will be announced soon, including more A-Share Physical ETFs. We know that there are some Shanghai-HK funds awaiting approval from the CSRC (China’s fund regulator) now. As the two markets merge Chinese investors will benefit from longer term approach of overseas investors, which will make the A share market more stable.
Professional investors from Private Equity and Hedge funds will be increasingly involved in trading the A share market directly, exploiting any momentary widening in the discount between Shanghai and Hong Kong. Family offices and private equity funds are definitely showing more interest in China A shares. We see it from the number of enquiries at our firm.
It is important to remember, though, that those fund managers investing via SH-Hong Kong Stock Connect can only invest in those 560 A shares. They are still prevented from accessing the high return and relatively high risk stocks on the ChiNext market.BM