Market access

Expanding Market Access Between Mainland China and Hong Kong

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

Mr. Alder noted in his speech that the SFC is keen to expand mutual recognition of funds between the mainland and Hong Kong (LIM) by relaxing the restrictions on the value of the flow of funds from the host market as well as the existing limits on the delegation of fund management. To this end, there has been industry lobbying and market rumors about the potential relaxation of delegation, minimum fund size and the current 50% NAV threshold for units sold to investors. from the continent. Another potential addition would be for Hong Kong-domiciled open-end fund companies (OFC) to be recognized under the MRF.

However, the expansion of the MRF framework is not intended to replace the Wealth Management Connect initiative (WMC) as the two regimes have different regulatory requirements. For example, WMC can be seen as an easier way for asset managers to target mainland investors because participating Hong Kong funds do not need to obtain approval from China’s securities regulator. securities, but at present it is geographically limited to the Greater Bay Area. In contrast, MRF is available throughout Mainland China. Therefore, we expect both initiatives to provide more opportunities in the future as they continue to grow.

Mr. Alder’s speech also touched on the implementation of the connection system for exchange-traded fund trading between mainland China and Hong Kong (ETF Login). ETF Connect aims to provide ETF managers with a fast and cost-effective way to make their funds available on a cross-border basis as part of Stock Connect. Participating ETFs will not be subject to product-by-product approval by the host regulator, although they will need to meet eligibility criteria regarding factors such as fund size, turnover and whether an index under -underlying primarily tracks stocks eligible for trading under Stock Connect. Initially, it looks like the number of eligible ETFs listed on the mainland will be much larger than in Hong Kong, indicating that there is room for the ETF market to grow in Hong Kong.

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

For further details on the ETF Connect initiative, please refer to our Client Alert, “ETF Connect: Implementation Details Announced”, which is available here.