Local media reported last week that asset managers in Beijing and Shanghai were speculating that the China Securities Regulatory Commission (CSRC) had concerns over a surging Hong Kong market, which prompted it to stop approving equity funds from the special administrative region.
In a statement, however, a CSRC spokesperson explained that the decision to halt the approval process was taken after the regulator encountered some bait-and-switch cases in the batch of new funds.
“The regulator runs close inspections on a daily and regular basis and before approving a product. We have discovered that some mutual funds named as a ‘Hong Kong equity fund’ are not investing in the Hong Kong stock market per se.”
In order to “protect investors’ legal rights and clear their doubts”, the regulator issued an instruction for asset managers in China launching Hong Kong equity funds that invest through the Stock Connect.
Three types of Hong Kong equity funds were targeted:
- Funds can be labelled a “Hong Kong equity” fund or with similar wording only if 80% or more of non-cash assets are invested in the Hong Kong stock market. Asset managers of this type of fund should hire a minimum of two people with at least two years of experience in managing investments and one of them needs to be the portfolio manager.
- Funds investing less than 80% of non-cash assets in Hong Kong equities cannot be labelled a “Hong Kong equity fund”. The maximum holdings of Hong Kong stocks in this type of fund is 50% of total equity assets. Asset managers of this type should employ at least one person who has two years of experience in managing investments but is not necessarily the portfolio manager.
- An index fund is allowed to carry the name of the benchmark it follows.
As of 10 November, thee were 425 funds awaiting regulatory approval with 59 named ‘Hong Kong equity’ or similar.
