As Chinese investors' desire to allocate assets globally increases, the quota for QDII (Qualified Domestic Institutional Investors) is expanded again but remains tight. Another type of QD product, QDLP (Qualified Domestic Limited Partners), is also being issued intensively, but the threshold is quite high, limited only to high-net-worth individuals. Against this backdrop, institutions are eagerly looking forward to the expansion of mutual recognition fund scales that are not subject to QD quotas.

The scale of mutual recognition fund quotas is expected to be implemented in the fourth quarter. According to First Financial Daily reporters, the scale of mutual recognition fund quotas is expected to be implemented in the fourth quarter.

As early as June 14 this year, the "Hong Kong Mutual Recognition Fund Management Regulations (Revised Draft for Comments)" issued by the China Securities Regulatory Commission mentioned that the sales ratio limit for mutual recognition funds in the host country will be relaxed from 50% to 80%. This means that with the subsequent revision and official release, the total scale of mutual recognition funds from the north is expected to continue to expand, and 80% of the fundraising of a fund registered and issued in Hong Kong can be raised from the mainland. In addition, another optimization direction is to allow the investment management functions of Hong Kong mutual recognition funds to be transferred to overseas asset management institutions within the same group as the manager.

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Generally speaking, funds that meet the standards in the mainland and are sold in Hong Kong are called "southbound" funds, while public funds that meet the standards in Hong Kong and are sold in the mainland are called "northbound" funds. In the past two years, as interest rates in the mainland have fallen and foreign investment has become popular, "northbound" funds have been sought after.

Data shows that nearly 20 foreign and Chinese international asset management companies have issued mutual recognition fund products, such as E Fund (Hong Kong), Bosera Fund (International), Huaxia Fund (Hong Kong), Hui Li Fund (Hong Kong), J.P. Morgan Asset Management, Orient Securities Asset Management, Schroders Investment Management, etc.

The investment themes of northbound funds cover global multi-assets, overseas stock markets, and overseas bonds, and the investment areas also cover Hong Kong, the United States, India, and more.

Zeng Shaokun, Head of Fund Distribution for Asia (excluding Japan) at Pictet Asset Management, recently said to First Financial Daily reporters that the mutual recognition fund was originally a 5:5 ratio (the proportion of mainland sales and Hong Kong sales in the total assets of the fund), and it is expected to be opened to 8:2 in the future. "This also indicates that when the Chinese government sees the increase in demand, it is also looking for some efficient channels to allow mainland investors to layout the global market. The quota for QDII is used up very quickly after each approval, and the mutual recognition fund introduced in 2016 and the cross-border wealth management pass introduced in the past two years are effective supplements, which can help mainland investors better understand the overseas market and diversify risks."

Guo Peng, Deputy General Manager of J.P. Morgan Asset Management China, said to First Financial Daily reporters that since the launch of QDII funds in 2006, many mainland fund companies have issued many QDII products that can invest in overseas markets, with low fundraising thresholds and a rich variety of products. However, these products are limited by quotas, and most products are currently in a "restricted purchase" state. Therefore, the mutual recognition fund that started in 2016 has been a supplement to QDII's foreign investment and has been operating for many years.

In his view, compared with QDII funds managed by mainland teams, mutual recognition funds belong to "original import" because institutions can directly introduce overseas products into the mainland market, and investors can buy products that have been operating overseas for many years and have a long-term historical track record. Moreover, the products are directly managed by overseas fund managers. "However, due to the 5:5 sales ratio limit, many mutual recognition funds are currently in a 'closed state'. If the ratio can be relaxed in the future, then the relevant products can continue to open and raise funds in the mainland." Guo Peng said.For instance, since January 11th of this year, Morgan International Bonds have suspended subscriptions from the mainland, and the Morgan Asia Total Return Bond Fund has done the same since May 11th, due to a 50% proportion limit. For the same reason, the Easy Fund (Hong Kong) Selected Bond Fund has suspended accepting subscription applications from mainland investors since July 10th.

Individual and institutional allocation demands are robust

According to the reporter's understanding from various channels, the current demand for overseas asset allocation from mainland investors and institutions is quite strong.

In addition to sales to individual investors, in fact, mutual recognition funds have also been used by institutions as a convenient tool for overseas allocation, such as bank-affiliated wealth management subsidiaries and securities asset management. An investment manager from a bank's wealth management company told the reporter that the overseas allocation part of wealth management products often directly purchases mutual recognition funds because it is faster and more convenient to operate, and some wealth management companies did not have QD qualifications in the early years. Moreover, the exchange rate calculation for mutual recognition funds is based on the real-time exchange rate, while the exchange rate for QDII needs to be based on the midpoint price. Over the past two years, the deviation of the midpoint price has still been relatively high.

For example, during the 2024 China Asset Management Annual Conference, Luo Pengyu, President of Evergrowing Wealth Management, stated, "In the past period, U.S. Treasury bond rates have declined, and it is expected that the Federal Reserve will cut interest rates again in September this year. This year, bank wealth management has invested in overseas assets through QDII, mutual recognition of funds, and other means, mainly focusing on Chinese dollar bonds and U.S. Treasury bonds, with a steady increase in scale and proportion. Many wealth management subsidiaries have seized this wave of overseas investment opportunities."

Furthermore, data shows that, as of the end of the second quarter of this year, 25 FOF products have heavily invested in Northbound Mutual Recognition Funds, involving 8 Northbound Mutual Recognition Funds (calculated separately for different shares of the same fund). The number of products heavily invested in by Northbound Mutual Recognition Funds has increased by 2 compared to the first quarter, with a total holding market value of about 280 million yuan.

The net subscription of Northbound Mutual Recognition Funds has been continuously increasing since last year. According to Wind data, as of now, the total scale of Northbound Mutual Recognition Funds is about 130 billion yuan. Limited by the 50% sales proportion, some products have been "closed," but the total quota is still relatively relaxed.

As of the end of the second quarter of this year, among the 8 Northbound Mutual Recognition Funds, the Easy Fund (Hong Kong) Selected Bond Fund M-CNYHDG has the highest holding market value. Three FOF products hold a total of 86.875 million yuan of this fund. In addition, the total holding market value of the Easy Fund (Hong Kong) Selected Bond Fund M-CNY also reaches 38.515 million yuan.

Among pure foreign-funded funds, the largest mutual recognition fund is Morgan Asset Management. Data shows that Morgan International Bonds is another Northbound Mutual Recognition Fund heavily invested in by FOF. Calculated separately for different shares of the same fund, the cumulative holding market value of Morgan International Bonds - PRCCNY heavily invested in by FOF at the end of the second quarter is 74.1567 million yuan, ranking second on the holding market value list; while the cumulative holding market value of Morgan International Bonds - PRCCNY hedged is 62.9136 million yuan, ranking third. North America (35.4%), mature Europe (28.6%), and mature Asia-Pacific region (14.6%) are the top three investment areas for this fund. After combined calculation, the holding market value of FOF funds for Morgan International Bonds reaches 137 million yuan, exceeding the aforementioned Easy Fund (Hong Kong) Selected Bond Fund.

The reason why mainland investment institutions are enthusiastic about the allocation of overseas bonds is that the market is optimistic about the performance of the bond market under the expectation of interest rate cuts by the Federal Reserve, and at the same time, they are also attracted by the high interest rates overseas.Currently, the market anticipates that the Federal Reserve will cut interest rates seven times before June 2025, with each cut being 25 basis points. The majority opinion suggests that the first rate cut will occur in September this year, with a high probability of a 25 basis point (BP) reduction.

Shawn Zeng told reporters, "Our team has found that during the six significant interest rate cut phases in 1989, 1995, 1998, 2001, 2007, and 2019, both stocks and bonds generally benefited. Although there were years when both stocks and bonds were falling, and other years when bonds were falling while stocks were rising, on average, both stocks and bonds had a relatively good performance."

Bloomberg data also shows that from 1989 to the present, during the six interest rate cut cycles (1989/1995/1998/2001/2007/2019), the average performance of stocks and bonds in the first year after the rate cuts, the NASDAQ index was 9.7%, the S&P 500 index was 5.8%, the total return on U.S. Treasury bonds was 6.2%, and the total return on U.S. aggregate bonds was 5.7%.

Optimization of Foreign Capital Strategic Layout

Referring to the investment trends after Japan entered a low-interest-rate period, Japan's overseas investments continued to heat up. Currently, data shows that the proportion of foreign currency assets held by Chinese residents is far less than 10%. Given the increasingly fierce competition in the domestic Chinese market, foreign institutions with more overseas investment advantages have begun to shift their focus to cross-border operations.

Several business heads of foreign institutions told reporters that cross-border businesses such as QDLP (Qualified Domestic Limited Partnership), cross-border wealth management, and mutual recognition of funds will be the focus of future efforts. However, many foreign institutions currently have their overseas fund products registered in Luxembourg, which facilitates global fundraising, but only funds registered in Hong Kong, China, can be included in the mutual recognition fund program. It is not ruled out that more foreign institutions may plan to register funds in Hong Kong in the future.

Securities research mentioned that the number of mutual recognition funds from the north has reached 39. Since 2023, the net subscription of mutual recognition funds from the north has shown a clear upward trend. As of the end of May, the cumulative net subscription amount of mutual recognition funds from the north reached 27.32 billion yuan, an increase of nearly 10 billion yuan compared to the 17.44 billion yuan at the end of last year; especially in the first quarter, the net subscription reached 8.17 billion yuan. In the past year, the net subscription amount of mutual recognition funds from the north has increased by more than 12 billion yuan.

A survey released by HSBC Group in June this year, targeting the global affluent population, shows that compared to a year ago, the investment willingness of respondents in mainland China is on the rise, and the desire for global allocation is strengthening. More than half (52%) of the mainland respondents plan to increase their investment in overseas markets, with Hong Kong, China, being one of the most concerned markets. The survey also found that as the economy continues to rebound and improve, mainland investors' willingness to reduce cash holdings and increase investments is gradually strengthening, with more than 30% of respondents planning to convert 61% of their cash into investments within the next year.