The Hong Kong government has added the Shanghai and Shenzhen stock markets to a list of approved exchanges in which the city’s pension scheme, the Mandatory Provident Fund (MPF), can invest, effectively opening up China’s bourses to local fund managers.
The new regulation will allow fund managers to take advantage of China’s booming tech-heavy stock markets, which have bounced back rapidly from Covid.
At stake is the more than HK$1 trillion ($129 billion) in MPF funds, which until the rule change could reportedly be invested in 42 overseas exchanges, including the New York Stock Exchange and the London Stock Exchange.
The decision, which took effect on Nov. 13, removed the MPF’s 10% investment limit on the yuan-denominated China A-shares.
Despite the cap, only about 1.1% of the MPF’s total assets, worth HK$11 billion, had been invested in A-shares, which are mainland-listed shares of Chinese companies.
The change should allow Hong Kong MPF members to tap growing opportunities in mainland stock markets. Shanghai and Shenzhen were among the best-performing markets worldwide in 2020 - the Shanghai Composite Index climbed nearly 14% while the Shenzhen Composite Index surged by more than 35%.
Hong Kong’s Hang Seng Index, meanwhile, disappointed as it fell 3.4%.
The MPF is a compulsory retirement scheme in Hong Kong covering 4.46 million members, including almost 3 million current and retired workers.
An employer and an employee each provide 5% of a monthly salary, up to a combined HK$3,000 maximum in mandatory contribution per month. Employees can choose the funds in which they wish to invest their contribution.
“We believe fund managers will enjoy greater investment flexibility, and at the same time MPF members will benefit from expanded fund choices and diversified risks,” Raymond Ng, vice-president and head of employee benefits at Manulife Hong Kong – the largest MPF provider in the city – said in a statement.
The change in regulation came at an interesting time for the MPF, which in December celebrated its 20th anniversary.
Among the biggest changes for the pension scheme will be the introduction of the electronic MPF platform, or eMPF.
While largely administrative, analysts say the centralised platform is set to make fundamental structural changes to the way that fund managers, and ultimately scheme members, deal with their pensions.
“The eMPF platform is much more than a technological change: it has far-reaching implications across various building blocks in the target operating model,” Albert Lo, PwC Hong Kong Financial Services Consulting Leader, said in a statement. “All stakeholders must adapt to ensure that they stay ahead of the curve.”
The current MPF system is framed as a “retail model,” which leads to retail fees being charged. The eMPF initiative, however, could change all of this.
“If scheme members could pool their capital together in a centralised scheme, they could be represented in the same manner as investors in an institutional mandate, which could result in institutional fees,” Marie-Anne Kong, PwC Hong Kong Asset and Wealth Management Leader, said in a release marking the 20th anniversary of the scheme.
The initiative could also lead to “stronger governance, competition and access to more sophisticated products not generally accessible to retail investors,” Kong added.
