Expanding market access between Mainland China and Hong Kong

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Authored by: Alwyn Li and George Ho

On 25 May 2022, Mr. Ashley Alder, CEO of Hong Kong’s Securities and Futures Commission (SFC) delivered a speech at the annual China Capital Markets Conference hosted by the Asia Securities Industry and Financial Markets Association.

Mr. Alder noted in his speech that the SFC is keen to expand the Mainland-Hong Kong Mutual Recognition of Funds (MRF) framework by relaxing restrictions on the value of fund flows from the host market as well as the existing limits on fund management delegation. To this end, there has been industry lobbying and market rumours on the potential relaxation on delegation, minimum fund size and the current 50% NAV threshold for the units sold to Mainland investors. Another potential addition would be for Hong Kong domiciled Open-ended Fund Companies (OFCs) to be recognised under the MRF framework.

However, the expansion of the MRF framework is not intended to replace the Wealth Management Connect initiative (WMC) since the two schemes have different regulatory requirements. For instance, WMC may be considered a simpler route for asset managers to target Mainland investors as there is no need for participating Hong Kong funds to obtain approval from the Chinese securities regulator, but at present, it is limited geographically to the Greater Bay Area. In contrast, MRF is available across Mainland China. Therefore, we expect both initiatives will provide more opportunities in the future as they continue to develop.

Mr. Alder’s speech also touched on the implementation of the connect scheme for trading of exchange-traded funds between Mainland China and Hong Kong (ETF Connect). ETF Connect aims to provide a quick and cost-efficient way for ETF managers to make their funds available on a cross-border basis under Stock Connect. Participating ETFs will not be subject to product-by-product approval by the host regulator, though they will need to meet eligibility requirements around factors such as fund size, turnover and whether an underlying index mainly tracks stocks eligible for trading under Stock Connect. At the outset, it appears that the number of eligible ETFs listed in the Mainland will be much larger than that in Hong Kong, which indicates that there is room for the ETF market to grow in Hong Kong.

ETF Connect will follow a “pilot” approach and will aim to “test the waters” as other schemes have done. Mr. Alder urged asset managers to remain patient as it is anticipated that eligibility requirements will be relaxed in due course as the initiative gains traction.

For details of the ETF Connect initiative, please refer to our Client Alert, “ETF Connect: Implementation details announced”, which is available here.

Key Contacts

Alwyn Li

Partner | Financial Services

Email or call +852 2825 9627