www.pwchk.

com

Mainland and
Hong Kong Mutual
Recognition of Funds
(MRF) A new era for
asset management
in China and
Hong Kong
Getting ready to
access the China
and Hong Kong
asset management
markets

Foreword
Hong Kong and Mainland Mutual Recognition of Funds
(MRF) was first announced by the Securities and Futures
Commission (SFC) in January 2013. After more than two years
of speculation, on 22 May 2015, the China Securities Regulatory
Commission (CSRC) and the SFC in Hong Kong signed the
Memorandum of Regulatory Cooperation on Mutual Recognition
of Funds between Mainland China and Hong Kong
(Memorandum). The Memorandum sets out the key principles
and operational requirements under the MRF which will be
implemented on 1 July 2015 and lays a foundation for the
strengthening of financial and regulatory ties towards greater
integration of the Asian asset management industry.
MRF represents an opportunity that international asset
management companies have long been waiting for: the business
opportunity to distribute investment funds within the Hong
Kong and Mainland retail markets. This is a defining moment for
international asset managers: Hong Kong can now operate as a
gateway for asset managers to China and for the first time,
Chinas rapidly expanding population of investors is directly
accessible to foreign funds.
Currently, Chinas AUM as a proportion of GDP is approximately
20% and is one of the lowest in the region. The low penetration
indicates that there is ample opportunity for growth in the asset
management industry since China has an aging society with
growth needs for retirement savings and investment
diversification strategies.
Hong Kong, on the other hand, represents a good opportunity
for domestic Chinese asset managers to reach international
investors. Currently, Hong Kong is the largest offshore RMB
centre. Thirty-eight out of the top 50 cross-border asset
management groups have presence in Hong Kong, which is the
second highest in Asia. The MRF will allow domestic Chinese
investors to have access to international investors and will be a
stepping stone for them to expand globally.

Marie-Anne Kong
Asset Management Industry Group Leader
PwC Hong Kong

The current framework states that only Hong Kong-domiciled

funds managed by an SFC-licensed asset manager will be able to
distribute into China, and vice versa. So, in order to be ready to
operate, asset management companies will need to reassess and
gear up their fund platforms and client strategies in order to be
fully compliant with regulatory requirements under the MRF.
The opportunity to break into the asset management markets of
China, Hong Kong and beyond is an exciting one. We envision
that investible assets across Asia will increase with the further
opening up of the Chinese market and the maturation of the
asset management industry in China and in Hong Kong. This
will translate into more avenues for investment and a wider
range of asset classes. We also expect to see a greater number of
innovative products and distribution channels emerging
throughout the region.

Preparing for market

MRF represents a mutual opening of the Hong Kong and China
retail markets to international asset managers, and the
international market to domestic Chinese asset managers. As the
leading professional services firm for the asset management
industry in both China and Hong Kong, we have many insights
into how you can prepare your market entry and expansion
strategies. We can provide guided advice on fund structuring,
audit, tax, operating models and infrastructures, organisational
structure, fund authorisation, regulation licensing and
compliance with ongoing regulatory requirements.

Jane Xue
Asset Management Industry Group Leader
PwC China

Mainland and Hong Kong Mutual Recognition of Funds (MRF) A new era for asset management in China and Hong Kong

Key requirements under Mainland

and Hong Kong Mutual Recognition
of Funds
At the initial stage, only general equity funds, balanced funds, bond funds and unlisted index funds (including physical indextracking ETFs) will be eligible under MRF. The SFC and CSRC may include other types of product in future. Their respective
mutual recognition requirements are laid out below:

Product

SFC requirements for entry to

Hong Kong

CSRC requirements for entry to

mainland China

Domiciled on the Mainland

Domiciled in Hong Kong

Registered with CSRC under the Securities Investment

Fund Law of the Peoples Republic of China as a
publicly-offered securities investment fund

Registered with SFC under the Code on Unit Trusts and

Mutual Funds
Established for over one year

Established for over one year

Fund size not less than RMB200 million

Fund size not less than RMB200 million

Not primarily investing in Mainland

Not primarily investing in Hong Kong

Distribution to Mainland investors doesnt exceed 50%

of total assets

Distribution to Hong Kong investors doesnt exceed

50% of total assets

Manager

Registered and operating on Mainland

Registered and operating in Hong Kong

Licensed by CSRC to manage publicly-offered

security investment funds

Licensed by SFC with Type 9 (Asset Management)

licence

Investment management function remains on

Mainland

Investment management function remains in Hong Kong

Not subject of major regulatory actions by CSRC in

the past 3 years or since date of establishment,
whichever later

No major punishment imposed by the SFC in the past 3

years or since the date of establishment, whichever later

Custodian

Any custodian qualified to act as custodian for publicly

offered securities investment funds pursuant to Mainland
laws and regulations

Any custodian qualified to act as custodian for unit trusts,

mutual funds or other form of collective investment scheme
pursuant to SFC requirements

Local
representative/
agent

Must appoint a Hong Kong representative holding a

Type 1 (Dealing in Securities) SFC licence

Must appoint a Mainland agent qualified to engage in

public-offered fund management business or fund
custodian business on Mainland

Operational and
ongoing
requirements

Complies with Chapter 9 of the Code on Unit Trusts

and Mutual Funds
Publicly available constitutive documents held at
Hong Kong representatives office
Bilateral notification requirement on pricing error,
change in dealings or suspension or deferral of
dealings

Complies with the relevant Mainland laws and

regulations
Inclusion of Mainland courts in the dispute
resolution mechanism set out in constitutive
documents

Inclusion of Hong Kong courts in the dispute resolution

mechanism set out in constitutive documents
Any changes to constitutive documents approved by
the CSRC must be filed with SFC

PwC

Major considerations
China and Hong Kong mutual fund markets
key statistics

Hong Kong

China

Total AUM (including

locally domiciled mutual
funds only)

US$60 billion

RMB5,241.4 billion

Total number of mutual

funds

1,126

2,027

Total number of mutual

funds eligible for MRF

About 100

About 850

Based on information as at 31 March 2015

Mainland and Hong Kong Mutual Recognition of Funds (MRF) A new era for asset management in China and Hong Kong

The following summarise certain key requirements which

asset managers in China and Hong Kong under the MRF
regime have to be aware of:

Product characteristics
characteristics
Currently, only general equity funds, balanced funds,
bond funds and unlisted index funds (including
physical index-tracking ETFs) are included. Other fund
types (such as money market funds) do not currently
come under the scope of the scheme. Funds must
consistently fulfil the requirements of their primary
investment focus.

Fund size

Fund assets must be above RMB200 million.

Distribution in the other market (i.e. China for a
HK-domiciled fund; HK for a China-domiciled
fund) must be below 50% of total net assets.
Consequently, asset managers should select funds
with a stable fund size that is well above RMB 200
million so that it will not be subject to suspension
of distribution in the other market.

Appointment of
local representative

The local Hong Kong representative or China agent is expected to play a major
role in ensuring mutual funds comply with cross-border regulations and distribution
limits in the other market. There would be useful synergies if this institution could carry
out other initial fund activities, such as preparation for the fund authorisation, distribution
and review of marketing materials.
One of the main eligibility criteria for mainland funds recognised in Hong Kong is that they
must appoint a local representative to handle share subscriptions, notices and regulatory
communications as required under Chpater 9 of the Code on Unit Trusts and Mutual Funds
(UT Code).
CSRC requirements for entry of Hong Kong funds to mainland China include the
appointment of a Mainland agent qualified to engage in public-offered fund management
business or fund custodian business on the Mainland pursuant to the host jurisdictions
laws and regulations.

Limits to delegation of investment

management functions
The management firm of the respective fund in its host
jurisdiction cannot delegate its investment management
functions to parties outside the host jurisdiction.

Ongoing regulatory
requirements

Under MRF, asset managers in China and Hong Kong have to be familiar with the
relevant rules and regulations imposed by both regulators (the SFC and CSRC). Asset
managers should reassess their compliance capabilities and resources to make sure they
can meet ongoing compliance needs.

Tax

Tax
The Memorandum is silent on the potential PRC tax implications on non-resident investors deriving income from a
Mainland fund recognised by SFC. With reference to the taxation on non-resident investors deriving income from
QFII/RQFII or Shanghai-Hong Kong Stock Connect, it is reasonable to expect that similar taxation rules may be
announced later to grant similar tax treatment, i.e. tax exemption, on mutually recognised funds. However, if such a
clarification is absent, how to disclose the potential tax implications in their offering documents can be a challenging
issue for asset managers in Mainland China. For Mainland China investors, whether the existing tax incentives for
mutual fund in mainland China could be extended to Hong Kong SFC authorised funds is still unclear.
Qualified Hong Kong domiciled funds authorised by the SFC under section 104 of the Hong Kong Securities and
Futures Ordinance are statutorily exempt from Hong Kong profits tax. There is no Hong Kong profits tax on any
distribution made by such an authorised fund to its investors (whether resident, non-resident, corporate, or individual).

PwC

Supporting your expansion into

China/Hong Kong
Whether you are setting up in Hong Kong for the first time or are already established, you will need a strategy for entering the
China market. Depending on your size and existing operations, you will face a range of challenges.

How we can help you succeed

Service areas

We can:

Market entry strategy

Conduct market research of the Hong Kong and Mainland fund industry to provide overviews of
key players, products and distribution channels
Perform industry benchmarking and research capabilities
Define market entry strategies, including investment vehicle and capital requirements
Define business model (customer segments, product strategies, etc.)
Define client relationship strategy and implementation
Assess eligibility criteria and capital requirements
Perform operational due diligence assessment on asset managers and distributor

Regulatory, governance and

compliance

Provide overviews of the regulatory landscape, compliance and tax requirements

Provide advice and assistance on licensing application and fund authorisation
Provide advice on differences between regulatory and compliance requirements for HK and China
mutual funds
Assess current governance frameworks and regulatory compliance programmes
Support ongoing regulatory compliance

Audit

Provide statutory audit services for asset managers and investment funds

Tax

Identify and advise how to address potential transfer pricing implications arising from cross border sales /
investment management
Tax planning for offshore fund re-domiciliation to Hong Kong
Group tax structuring and offshore income claim
Executives and expatriate income tax planning
Work visa applications
China indirect tax planning
Tax structuring on cross border distribution of fund products by fund managers in Hong Kong and/or China
Corporate, employer, and/or employee tax filing

Operating model and

infrastructure

Design/validate operating model and infrastructure requirements to support the business strategy/model
covering the following areas:

Assess operating model options for building out of Hong Kong funds platform, including in -house
build or outsourcing to third parties

Assess potential third-party vendors and service providers in Hong Kong/China; develop vendor
evaluation programmes and RFP processes

Design end-to-end business processes for key functions, including transfer agency, fund
administration and custody

Define interactions with head office/offshore entities

Benchmark against industry peers and/or process re-engineering

Review internal control readiness

Assess additional operational or reporting requirements for Hong Kong and China initiatives
Organisation structure
and human resources

Design or assess organisational structure, including key roles and responsibilities

Assess requirements and skills gaps, e.g. language, experience, etc.
Assess compensation structures, individual tax planning, compliance and talent management processes

Mainland and Hong Kong Mutual Recognition of Funds (MRF) A new era for asset management in China and Hong Kong

Use our unrivalled network in China

and Hong Kong
We are the leading professional services firm in China and Hong
Kong and are best placed to give you the insights and connections
you need to capitalise on Chinas exceptional market
opportunities. We have invested heavily to attract the best talent
to deepen our expertise and increase our strengths.
With the largest number of specialist asset management staff
servicing the largest share of the local asset management sector,
we can help you make the right connections and get to know the
local regulators.
We work closely with PwCs global asset management network,
providing access to industry best practice all over the world.

PwC

Contacts

After many years of gradual progress, China's asset management market is finally about to open up to international asset managers
and vice versa. For insight and support, please contact us:

Hong Kong

China

Marie-Anne Kong

Jane Xue

Asset Management Leader

PwC Hong Kong
+852 2289 2707
marie-anne.kong@hk.pwc.com

Asset Management Leader

PwC China
+86 (21) 2323 3277
jane.xue@cn.pwc.com

Florence Yip

Oliver Kang

Asia Pacific Asset Management Tax Leader

PwC Hong Kong
+852 2289 1833
florence.kf.yip@hk.pwc.com

Tax Partner
PwC China
+86 (10) 6533 3012
oliver.j.kang@cn.pwc.com

Matthew Wong
Tax Partner
PwC China
+86 (21) 2323 3052
matthew.mf.wong@cn.pwc.com

www.pwchk.com
This content is for general information purposes only, and should not be used as a
substitute for consultation with professional advisors.
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