June 2015 EDITORIAL: Guiding a mutually beneficial relationship

The past year has been earmarked with landmark agreements between Mainland China and Hong Kong that have opened up previously unseen channels for cross-border trade and investment.

In a highly touted agreement that commences July 1, a mutual fund recognition scheme will allow streamlined cross-border fund sales, with a massive 600 billion RMB quota, higher even than the Shanghai-Hong Kong Stock connect which opened to great fanfare in late 2014. This will, for the first time, allow funds to be transacted between Mainland China and Hong Kong on equal terms.

Initially, the first batch of funds that will be allowed for sale will be general equity, bond, mixed, unlisted index, and physical index-tracking exchange traded funds. At a later date, Securities and Future deputy chief executive Alexa Lam Cheung Cheuk-wah has said that the second batch could extend the scheme to exchange-traded funds.

This is a key area where Hong Kong and AmCham in particular can advocate and deliver thought leadership on international best practices in facilitating cross-border transactions, thus maintaining Hong Kong’s global role as a core financial center, boasting a deep knowledge base and global perspective.

With the experiences garnered from the aforementioned connect that opened last year, there must be encouragement for clear and transparent rules regarding application procedures and eligibility requirements, as well as reporting standard operating procedures. Without such lucidity, the ability for Hong Kong-domiciled funds would be hampered by uncertain rules.

Though Hong Kong’s stock market has seen a recent surge because of cross-border schemes, with the stock market performing at its highest in years, the energy must be watched carefully.

For example, following the provisions set up by the China Securities Regulatory Commission, it will be obligatory for all eligible Hong Kong funds to sell via recognized fund distributors in the Mainland. There will be a need for experienced service providers based in Hong Kong to discern and evaluate all dealings pertaining to the scheme, in order to provide investors with the most comprehensive information available.

Currently, mainland mutual fund market assets total nearly half a billion USD, and are expected to grow rapidly in the next decade. With the scheme’s arrival, many Chinese and global firms will likely expand in Hong Kong. There is great opportunity in this arena, and a chance for the city to leverage its experience and global reach.

Hong Kong enjoyed the first qualified foreign institutional investor (QFII) quota back in December of 2011, which gave the city’s financial institutions the unprecedented opportunity to create offshore yuan funds investing in Mainland Chinese stocks and bonds. Since then, Beijing has also given RQFII quotas to the markets in Singapore, London, Luxembourg, and Paris.

It is probable that, as China’s market continues to open itself to the rest of the world, the Central Government will extend a favorable status to other markets as well. With the scheme, it is crucial to have a successful start and clear communication between the markets in order to emphasize the importance of Hong Kong. If successful, the SFC and CRSC hope to expand the scheme further.

Investors are still awaiting the announced cross-border scheme that will connect the Hong Kong and Shenzhen stock markets. Indeed, it’s an exhilarating time to participate in the market, and the opportunities to develop access between Hong Kong and China’s markets are seemingly endless.

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