The mutual fund recognition agreement between Hong Kong and the mainland kicks off on Wednesday. However, the long-awaited Shenzhen-Hong Kong Stock Connect has reportedly been delayed due to technical issues.
The stock link with Shenzhen is part of efforts to build mutual market access between the mainland and Hong Kong, according to Guoyuan Securities chief executive Wang Erhong. He expects the scheme to be launched later this year despite the technical issues.
Wang said the stock connect with Shenzhen may attract more interest than the trading link between Hong Kong and Shanghai. The new scheme will offer wider choices and more diversity for mainland investors in terms of trading rules, time and eligible stocks.
Also, Shenzhen and Hong Kong already have close economic ties, and the new scheme will deepen their economic interaction.
Southbound trading is expected to be strong given that the P/E ratio of the Hong Kong market is around 20 to 30 times, making it relatively attractive for mainland investors.
Under the mutual fund recognition program, there are around 100 funds in Hong Kong that are eligible to tap into the mainland market, while as many as 850 funds on the mainland could potentially sell into Hong Kong.
The scheme will be a game-changer. A fund company has to be domiciled in Hong Kong and be authorized by the Securities and Futures Commission before it can be allowed to sell in the mainland market.
A number of global fund houses are registered on the Cayman Islands and Bermuda, and they have to register in Hong Kong if they want to sell products on the mainland.
The move is aimed at transforming Hong Kong into a global fund management hub and further cement its status as a global financial center.
Wang said foreign funds should adapt to the preferences of mainland investors and sell straightforward products to the mainland market.
Also, mainland investors are used to buying products that guarantee the return of their principal, which means they are less sensitive to risks.
Meanwhile, Hong Kong investors may be interested in mainland funds because of their more attractive yields.
The Qualified Domestic Individual Investor program, known as QDII2, is another theme the market is closely watching, Wang said. He expects the scheme to be launched soon in six Chinese cities, namely Shanghai, Shenzhen, Tianjin, Chongqing, Wuhan and Wenzhou.
The program will expand the investment scope for mainland investors to cover equities, bonds, derivatives and other instruments, marking another milestone in the effort to make the Chinese currency fully convertible.
The program offers individual investors a new platform for global asset allocation.
This article appeared in the Hong Kong Economic Journal on June 29.
Translation by Julie Zhu
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