(Yicai) Aug. 22 -- Chinese authorities are likely to relax the quota for northbound Mutual Recognition of Funds, which are Hong Kong-registered investment funds that can be sold in the mainland upon meeting certain requirements, in the fourth quarter as more Chinese mainland investors seek to expand their global asset allocation, industry insiders told Yicai.

Chinese authorities are considering relaxing the cross-border sales limit to 80 percent from 50 percent, according to a draft policy released by the China Securities Regulatory Commission in June. Should the policy come into force, it will allow mainland investment in Hong Kong funds, many of which have allocations in overseas markets, to increase significantly.

Northbound MRFs have become increasingly popular on the mainland in recent years due to the sluggish mainland stock markets and the strong performance of overseas bourses.

As of the end of May, mainland subscriptions in northbound MRFs had surged almost 60 percent from the end of last year to CNY27.3 billion (USD3.8 billion), a jump of nearly CNY10 billion.

But due to the 50 percent cap, many northbound MRFs are not able to receive any more investment from mainland investors, even though there is still space available.

"Due to the sales quota, a number of MRFs are currently 'closed' in the mainland. If this quota is adjusted or the upper limit is lifted, these funds will be able to raise a lot more capital from mainland investors,” said Guo Peng, deputy general manager of J.P. Morgan Asset Management China.

Qualified Domestic Institutional Investor funds, which are overseas securities purchased by eligible Chinese financial organizations, are managed by mainland institutions. But MRFs are directly managed by overseas fund managers, allowing investors to purchase products that have been operating overseas for many years with long-term performance records, Guo said.

"My bank’s wealth management subsidiary will usually use the funds allocated to overseas markets to buy MRFs," an investment manager at a Chinese domestic bank told Yicai. This is because, compared to other types of investments, MRFs offer faster transaction speeds and greater operational convenience, and apply the market currency conversion rate at the time of the transaction.

China had 25 Fund of Funds heavily invested in northbound MRFs with combined holdings of CNY280 million (USD39.26 million), as of June 30.

"Cross-border investments, including MRFs, will be a key focus for our companies in the future," the heads of several foreign institutions told Yicai.

More than half of affluent Chinese said they plan to increase their investments in overseas markets with Hong Kong being one of the most closely watched markets, according to a survey conducted by UK banking giant HSBC Group in June. This is a lot more than a year ago.

Nearly 20 foreign and Chinese asset management companies, including J.P. Morgan Asset Management, Amundi Asset Management, Schroder Investment Management, have issued MRFs in Hong Kong to date. MRFs were launched by the China Securities Regulatory Commission and Hong Kong Securities and Futures Commission in 2015 to enable deeper integration of the two capital markets.

Editors: Tang Shihua, Kim Taylor