Yuan-based MPF funds are catching on among Hongkongers even as they underperform other categories.
Investors are optimistic the currency will continue to appreciate, lifting the funds’ returns in Hong Kong dollar terms, but pension providers say the funds will fail to fulfil their potential as long as they remain hobbled by various regulations.
Of the 456 investment funds under the umbrella of the Mandatory Provident Fund, the retirement finance scheme that covers 2.4 million employees in the city, just eight are yuan funds.
They mainly invest in yuan deposits or dim sum (offshore yuan) bonds.
Fund providers say that despite their small number at present, yuan funds could be a new growth area within the MPF as many employees opt to invest their mandatory contributions in these funds.
“When we conducted regular market research a few years ago to gauge the public’s opinion about MPF fund choices, we found that MPF members had an increasing need for products with investment exposure to yuan,” said Belinda Luk, senior vice-president of pensions and group business at Sun Life Hong Kong.
In June last year, Sun Life became the first provider to introduce a yuan-denominated MPF fund. Sixteen months on, the assets in the fund have grown to HK$232 million, making it the largest MPF yuan fund available.
Other providers that offer MPF yuan funds include Bank Consortium Trust (BCT), Bank of East Asia, Invesco, Allianz and BOCI-Prudential.
Lau Ka-shi, BCT’s managing director and chief executive, said the strong appreciation of the yuan, which has risen almost 35 per cent against the US dollar since 2005, is the reason employees choose yuan funds in the MPF.
“China continues to record trade surpluses against its major trading partners, adding pressure on the yuan to appreciate,” she said.
Elvin Yu, managing director and head of institutional business in Hong Kong for Allianz Global Investors, said the yuan MPF funds were suitable for employees who do not want to take too high a risk but want a better return than Hong Kong dollar deposits.
Large yuan deposits now offer an interest rate of 2.5 per cent to 3 per cent, higher than Hong Kong dollar deposits, which return less than 1 per cent, Yu said.
The three yuan-denominated MPF bond funds had an average return of 0.72 per cent last month, while the returns of the five money market funds ranged from 0.35 per cent to 0.74 per cent.
While these returns were much higher than the 0.07 per cent average for Hong Kong dollar money market funds, they fell far below the average of 2.13 per cent for all MPF funds and the average of 2.81 per cent for China equity funds in the MPF.
Yu said the yuan funds could offer a better investment return if certain regulations were done away with.
“Under the MPF law, all investment funds must invest at least 30 per cent of their assets in Hong Kong dollar assets, which means yuan MPF funds cannot be fully invested in yuan assets,” Yu said.
“Another problem is China has not yet opened up its stock and bond markets to overseas investors. This means MPF yuan funds can invest only in deposits and dim sum bonds but not stocks. This has restricted their performance.”
Pension fund providers can invest in the mainland stock or bond markets only via the qualified foreign institutional investor (QFII) scheme, which grants quotas to offshore investors using foreign currency, or the renminbi qualified foreign institutional investor (RQFII) scheme, which grants them to offshore investors bringing yuan into the mainland markets.
“If China would grant more RQFII quota to MPF providers to invest in the mainland stock and fund markets, the providers could offer yuan stock funds or on-shore yuan bond funds. This would offer more choice and better return for MPF members,” Yu said.
Mark Konyn, chief executive of Cathay Conning Asset Management, says another obstacle is the rule that prevents Hong Kong individuals from exchanging more than 20,000 yuan a day.
“There has previously been concern that yuan-denominated funds would encounter additional liquidity risk at times of stress,” Konyn said.
“However the market for offshore yuan is growing rapidly, and the assessment of such risks appears to be diminishing.”