Opinion | Chile is first stop on Hong Kong fund industry’s route to China expansion

Something has happened in the cross-border funds industry that has gone almost completely unnoticed – the Comisión Clasificadora de Riesgo (CCR), the Chilean regulator, approved China Asset Management’s CSI 300 Index ETF for distribution to Chilean pension schemes.

The exchange traded fund (ETF) is only the second Hong Kong domiciled fund approved by the CCR, but it is quite possible that this seemingly innocuous event – which happened last September – may yet be a major milestone in the global cross-border fund industry, one that spurs mutual recognition of funds between Hong Kong and the mainland and seals the city’s status as a true cross-border fund centre.

When launched, the mutual recognition programme will allow mutual funds regulated in the mainland and Hong Kong to be automatically approved for sale to investors in both places without further approvals.

It is widely believed that the programme will include initial restrictions on the amount of money a Hong Kong fund can raise from mainland investors as Beijing officials want to prevent the crowding out of mainland funds and managers.

A ratio governing how much money a Hong Kong fund can raise in the mainland is likely to be established. Assuming the ratio is 1:1 – for every dollar raised in the mainland, a dollar must be raised elsewhere – the ability to broaden products to a non-China investor base will be critical to success.

The ability of a Hong Kong fund to get inflows from Chile’s pension funds, which at last measure had US$170 billion (HK$1.3 trillion) in assets, is important because it adds to the overall non-China investor base and, by extension, increases allowable flows from mainland China investors.

Imposing a ratio will likely drive Hong Kong funds to seek additional markets of distribution, to further increase the potential flows from the mainland.