The recent surge in the popularity of mutual recognition funds, particularly those available for investment in the mainland markets from Hong Kong, has stirred quite the conversation among investors and financial professionals alikeOn January 1st, the gates were opened for these funds, leading to a remarkable event where several mutual recognition funds reached their sales limits within a single dayThis has not only caught the attention of individual investors but also raised eyebrows within institutional circles as massive fund inflows started to accumulate at a staggering pace, particularly in products targeting US Treasury bonds.

By January 6th, two notable mutual recognition funds from Morgan Asset Management announced a suspension of further purchase applications right after reopening for subscriptionThe speed with which these funds amassed capital was notable; they saw their contributions from mainland investors quickly exceed 60% of their total scale

The story was similar for other products such as the E fund and Huaxia fixed income fund, which both sold out within a day and were forced to initiate proportional allocation strategies due to overwhelming demand.

Consider the Southern Eastern English Selected US Dollar Bond Fund, whose capital grew by over 10 billion yuan within just two trading days from the initiation of the new mutual recognition regulationsBefore these changes took effect, the fund’s net asset value was just around 1.9 billion yuanHowever, following the new measures and within a few short days, its assets skyrocketed to 65 billion yuan by January 3rd, reached a formidable 150 billion yuan by January 6th, and ultimately surged to 180 billion yuan by January 7thSuch rapid growth clearly indicates how investor appetite for these offerings has notably accelerated.

This sudden demand has left many funds closed to new investors

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For instance, on January 8th, Bosera International announced that its Bosera Selected Emerging Markets Bond Fund would stop accepting applications from mainland investors starting January 9th—an announcement made in light of the mainland sales taking a staggering 78% of the fund’s totalSimilarly, Southern Eastern English’s announcement indicated that its fund reached a 75% threshold in sales to mainland clients, opting for a halt in applications from January 10thConcurrently, reports indicated that by mid-January, six different mutual recognition funds had already suspended new subscriptions from mainland investors.

According to various industry professionals, this frenzy can be attributed to several factorsOne prevalent reason is the so-called “asset drought” that has compelled investors to seek more lucrative optionsThis perceived scarcity of appealing investment choices has made mutual recognition funds attractive, especially since they provide a cross-border investment opportunity distinctive for their broader quotas and strong management competency.

Andrew, a fund manager based in Beijing, noted that the products currently attracting significant interest mostly emphasize investment-grade US Treasuries and corporate debts, as investors hold a more thorough understanding of the US macroeconomic landscape

Given the historical average of higher US treasury yields, many investors view these as a more reliable option, especially in an environment with potential for consistent and substantial returnsMoreover, these investment-grade bonds are perceived to carry lower risk than other obligations, making them a preferred choice among domestic investors.

It’s worth mentioning that institutional investors primarily drive the current subscription frenzy, including wealth management subsidiaries and proprietary trading from brokerages, leading to robust capital inundations into selected mutual recognition offerings.

Looking ahead, the performance of mutual recognition funds in 2024 piqued the interest of a wide array of businesses and institutional entitiesMany investors now feel a stronger grasp on the mechanics and implications of these funds due in part to extended educational outreach and market research from 2023. With the additional scaling of mutual recognition funds as of January 1, a tidal wave of finance has been funneled into these lucrative products.

Among the driving forces behind this explosive demand is the psychological aspect of investors feeling the urgency to participate before quotas run out—especially in light of persistent asset scarcity within mainland markets

Though the funds present high limits, there remains a finite nature to these opportunities, propelling many entities to act quickly given the backdrop of limited offerings.

However, alongside this hot trend lies an undercurrent of risk that warrants thoughtful considerationThe National Foreign Exchange Administration’s latest statistics indicated that by the end of November 2024, the net sales of Hong Kong mutual recognition funds in the mainland had reached an impressive 41.5 billion yuan—a remarkable surge of over 200 billion yuan since the beginning of the year, tallying an overall growth exceeding 100%.

Various financial professionals have highlighted cautionary notes, particularly regarding the uncertainties tied to US economic policies and the Federal Reserve’s decision-making —elements notoriously difficult to predictMoreover, actual foreign investment entails a spectrum of risks, notably with respect to the US stock markets.

Another crucial factor to keep in mind is the fluctuation of the renminbi against the USD while investing in mutual recognition funds

As pointed out by a QDII fund manager, over the past year, the devaluation of the renminbi against the USD resulted in approximately a 3% exchange benefit to mutual recognition fund investorsSuch dynamics can shift quickly, particularly if economic outcomes fall short of expectations, leading to potential reversal of dollar strength, subsequently putting those invested at risk of notable currency losses.

Finally, whether dealing with US Treasuries or Asian dollar bonds, both present considerably higher volatility than the domestic bond market—a concept not to be brushed asideA public fund representative in Shenzhen emphasized that, based on patterns over the previous two years, the annualized volatility of overseas bond markets is roughly five to ten times that of the domestic marketAs such, with numerous undervalued blue-chip stocks nestled within A-shares providing substantial latent investment value, there seems little need for investors to rush towards these foreign securities.

The industry is clearly at a pivotal juncture where the competition for mutual recognition funds could intensify