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Northbound funds see continued outflows since May

Mainland investors have favoured onshore funds as the domestic market continues to outperform the rest of the world.
Waste: UK pounds coins being washed down the drain.

Hong Kong-domiciled funds sold in the mainland via the Hong Kong-China Mutual Recognition of Funds (MRF) scheme continued to see net outflows in September, bringing year-to-date redemptions to RMB 1.60bn ($238.1m), according to the latest data from China’s State Administration of Foreign Exchange.

This was the fifth consecutive month that the funds saw net redemptions since May, as investors in the mainland have favoured China’s domestic financial market.

Northbound fund flows

Monthly net flows in RMB Quarterly flows
Q1 January (407.1m) (906.61m)
February 1.03bn
March (1.53bn)
Q2 April 2.28bn 1.65bn
May (258.8m)
June (367.01m)
Q3 July (1.17bn) (2.35bn)
August (418.3m)
September (760.87m)
YTD net flows: (RMB 1.60bn)
2019 total net inflows: RMB 7.16bn
Source: SAFE. *Figure at the end of the month

“One of the reasons there have been outflows from northbound funds since May could be due to Chinese investors pulling their money out from offshore funds to invest in onshore funds due to the stronger performance of the Chinese stock market amid Covid-19 with much uncertainties in offshore markets,” Kean Yung Siau, Singapore-based analyst at Cerulli Associates, told FSA.

“This is evidenced by the huge assets raised by onshore mutual fund IPOs, which exceed RMB 2trn as of the end of September. Equity-related funds such as equity funds, equity-oriented balanced funds and equity index funds account for close to 50% of the assets raised.”.

The Chinese onshore bond market also provides higher yields compared with other developed markets, Siau added.

“The spread between the Chinese 10-year government bonds and their US counterparts exceeded more than 250 basis points in July.

“So, the better onshore market performance in both the stock and bond markets could have caused the outflows from northbound funds as investors shift to onshore funds.

“Big MRF players such as the JP Morgan has also introduced sales restrictions to its northbound funds in August to ensure sound returns can be achieved, which would also add to the overall outflow trend,” he said.

This year, CSRC approved six funds under the MRF scheme, which include products managed by Amundi, JP Morgan Asset Management, Pictet Asset Management and HSBC Global Asset Management.

Seven more funds are still awaiting regulatory approval, which include products managed by Gao Teng  Global Asset Management, China Asset Management, Fidelity, E Fund ManagementIncome Partners and BOCHK Asset Management, CSRC records show.

Southbound funds

Meanwhile, investors in Hong Kong have poured RMB 36.16m into southbound funds (mainland-domiciled products sold in Hong Kong) in September, bringing year-to-date net inflows to RMB 168.4m.

Southbound fund flows

Monthly net flows in RMB Quarterly flows
Q1 January 63.69m 59.02m
February (21.18m)
March 16.51m
Q2 April 2.88m 6.18m
May 530,000
June 2.76m
Q3 July 68.8m 103.21m
August (-1.75m)
September 36.16m
YTD net flows: RMB 168.4m
2019 total net outflows: 168m
Source: SAFE. *Figure at the end of the month

Siau expects the inflows toward southbound funds to continue, as investors outside of China are also optimistic about the onshore markets.

Similarly, onshore China-focused funds sold in Hong Kong and Singapore, including equity and bond funds, attracted $4.7bn during the third quarter, according to Morningstar data, which excludes China-domiciled funds offered under the MRF scheme. The inflows also came from other markets outside of Hong Kong and Singapore, as the data included cross-border funds.

However, southbound funds under the MRF scheme still have gained little traction compared with northbound products. Since the MRF scheme was launched in 2015, southbound products have only gathered RMB 433.58m, while investors have poured RMB 14.58bn in northbound funds.

Part of Mark Allen.