China-HK cross-border funds scheme overshadowed by bad timing, limited choice

China-HK cross-border funds scheme overshadowed by bad timing, limited choice

HONG KONG, Dec 22 (Reuters) - China and Hong Kong have approved the first funds to be marketed under a long-awaited cross-border scheme, but unfortunate timing, lack of variety and the growth of alternative investment options have taken the sheen off the initiative.

The China Securities Regulatory Commission and Hong Kong Securities and Futures Commission on Friday said seven funds could be marketed in each other's territory under a "mutual recognition of funds" programme three years in the making.

The scheme has been hailed as the latest milestone in the opening-up of China's financial markets by allowing global asset managers to tap into Chinese household savings via funds set up in Hong Kong.

But the approved funds all invest client money in shares and bonds in Asia and China in particular, where the benchmark share price index fell 34 percent over June to October. The MSCI Asia-Pacific (ex-Japan) index has also lost 13 percent this year and is widely expected to fall in 2016 as factors such as economic slowdown in China dampen investment in the region.

"Interest in the mutual recognition of funds will be curbed at the beginning as the stock markets in both China and Hong Kong are hovering around low levels and lack upward momentum," said China chief economist Liao Qun at Citic Bank International. "Investors have concerns about each other's market as they are not familiar with it."

The funds' appeal has also been dulled by other new cross-border schemes such as the Hong Kong-Shanghai Stock Connect, where shares can be traded on each other's exchange, as well as relaxation to other schemes that allow domestic institutions to put money into overseas stocks and bonds.

Chinese and Hong Kong securities regulators began discussing mutual fund recognition in 2012 but later prioritised the Stock Connect. The funds scheme formally started in July this year but with Chinese share prices in free-fall, market participants had to wait another five months before four Chinese and three Hong Kong funds became the first of 47 applicants to gain approval.

"We have all been waiting such a long time," said Stewart Aldcroft Chief Executive of CitiTrust, which has been helping funds with their applications. "It is a huge disappointment that such a small number of funds have been approved and that there aren't many broader investment choices in the first batch."

The scheme's key attraction compared with other cross-border investment schemes is its focus on individual rather than institutional investors, said Michael McCormack, executive director at consultancy Z-Ben Advisors.

However, he said, "I don't think any of the asset managers are betting all their chips on their first fund launch." (Reporting by Michelle Price; Additional reporting by Michelle Chen; Editing by Christopher Cushing)

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