Greater exposure by MPF to mainland markets makes sense
- Rule change that allows managers to invest in A shares should be welcomed with the Shanghai and Shenzhen exchanges doing so well, particularly if fees are low
As China works to liberalise its capital markets, it makes sense for Hong Kong regulators to allow Mandatory Provident Fund managers to invest in mainland A shares.
The rule change, effective immediately, means adding the Shanghai and Shenzhen bourses to a list of approved exchanges for the MPF – a pot worth more than HK$1 trillion (US$129 billion) – to invest in, besides the 42 current overseas exchanges such as the New York Stock Exchange, the London Stock Exchange and the bourses in South Korea, Ireland and Mexico.
But while fund managers and MPF account holders can now gain greater exposure to the booming mainland stock markets, it also means they are exposed to more risk, as mainland stocks tend to be more volatile and do not always reflect the broader Chinese economy. This is despite the recent outperformance of the mainland markets.
The Shanghai Composite Index has climbed 10 per cent and is one of the world’s top 10 winners this year, while the Shenzhen Component Index surged by a third this year, compared to a 6 per cent fall in the Hang Seng Index.
To diversify the risk, it makes sense that the Mandatory Provident Fund Schemes Authority has declared its preference for fund managers to allocate more to A shares from their existing funds rather than starting single-country funds based on those shares.
Previously, MPF fund managers could not invest freely in the two mainland markets, as both were not fully open to international investors. This meant only 1.1 per cent – or HK$11 billion – of the MPF’s total assets has been invested in A shares, the domestically listed shares of mainland companies that are traded in yuan.
There is therefore ample room to expand MPF exposure. But fund managers must be cognisant of the new risk, and their responsibility to protect the retirement funds of Hong Kong’s 4.46 million employees and MPF account holders.
Shanghai’s stock exchange is Asia’s largest bourse, and its combined value with the smaller Shenzhen market gives China the world’s second-largest capital market. It no longer made sense to stop fund managers investing in such large and important markets.
But as the new rule will create new profit opportunities for the fund houses, they must show integrity and keep their fees and charges reasonably low. Regulators should hold them to account.
Despite the lowering of fees in recent years, especially for passive funds that track indexes, local MPF fees remain high relative to many overseas markets in developed economies. That just eats into the often inadequate funds for people to retire on.
But on balance, the new rule is certainly welcome as expanded fund choices and diversified risks should benefit MPF account holders and investors.