MRF products suffer two-way outflows

It was the first month since January of net outflows from northbound funds, which are Hong Kong-domiciled products available to mainland investors under the Mutual Recognition of Funds (MRF) scheme.

A net RMB 111.7m ($15.84m) was withdrawn from Hong Kong-based products in October, after eight consecutive months of net inflows.

The MRF between mainland China and Hong Kong is a scheme jointly launched by the China Securities Regulatory Commission (CSRC) and Hong Kong Securities and Futures Commission (SFC) in July 2015. Under the scheme, eligible mainland and Hong Kong funds can be distributed in each other’s market through a streamlined vetting process.

Although Chloe Qu, manager research analyst of Morningstar (Shenzhen) told FSA that “there are no reasons to explain the outflows in October”, it is likely that rising anxieties about the escalation of the protests in Hong Kong and the hardline response of the authorities in Hong Kong have had an impact.

Nevertheless, northbound products have garnered RMB 7.2bn so far this year, according to the latest data from Safe, fuelled by large net inflows between March and July amid a worsening of the China-US trade dispute and concerns about a slowing domestic economy and renminbi depreciation.

“Domestic investors’s increasing demand for global asset allocation might be a key factor driving the inflows,” said Qu

“Chinese investors’ concerns on the domestic economic slowdown amid rising trade war tension increase the need for asset diversification. It is also evident in the growing demand for QDII (qualified domestic institutional investor) products, which have also seen inflows over the year,” she added.

In particular, eligible onshore investors turned to global fixed income products and absolute returns funds to mitigate the risks, Barbara Ferraresi, director of global distribution solutions at Broadridge, told FSA previously.

This year, the CSRC has approved five Hong Kong-domiciled products for mainland distribution under the MRF, and since 2015, 20 northbound products have been approved by China’s regulator.

A Hong Kong-domiciled emerging market bond fund managed by Bosera Asset Management International was among three products approved in November by the CSRC for sale via the MRF scheme.

Northbound fund flows

Source: Safe. *Figure at the end of the month

Southbound fund outflows

Meanwhile southbound funds — mainland-domiciled funds sold in Hong Kong — again had net outflows in October,  after suffering withdrawals every month since April, except for small net inflows in July.

A total of RMB 4.63m was redeemed in October, bringing net outflows so far this year to RMB 166.63m.

Since the MRF scheme started, net inflows for northbound products have totalled RMB 16.5bn, dwarfing southbound fund inflows of RMB 266m.

“It is notable that the demand for onshore products in Hong Kong has been weak since the MRF scheme launched in 2015. Southbound fund’s total net sales of RMB 266m is much smaller than northbound fund’s RMB 16.5bn,” said Qu.

The SFC has approved around 50 China-domiciled funds to be sold in Hong Kong, but only two dozen funds have been made available to investors.

Meanwhile, Hong Kong investors are able to choose from a myriad other SFC approved products distributed and managed by international firms, including funds with exposure to China onshore equities and bonds.

“Compared to [mainland] investors, Hong Kong investors enjoy wider product choices, which put onshore funds into fierce competition with Hong Kong and international fund managers. Besides, the onshore managers’ names in Hong Kong might not be as recognisable as in the mainland, which also puts them at a disadvantage,” said Qu.

Southbound fund flows

Source: Safe