RMB share classes for funds denominated in non-RMB currency
- A fund may have different share classes e.g. a class of share in a currency that is different from the currency in which the fund is denominated (generally known as the "base currency" of a fund).
- Certain funds denominated in non-renminbi (RMB) currency with limited or no RMB-denominated underlying investments may offer RMB share classes.
- Whilst the availability of RMB share classes provides additional RMB investment options for Hong Kong retail investors, there are key risks associated with investment in RMB share classes offered by non-RMB denominated funds with limited or no RMB-denominated underlying investments.
What are the key risks associated with RMB share classes of funds denominated in non-RMB currency with limited or no RMB-denominated underlying investments?
RMB currency risk
- RMB is currently not freely convertible and is subject to exchange control policies and restrictions imposed by the Mainland authorities.
- Like any other currency, there is no guarantee that RMB will not depreciate.
- If you are a non RMB-based (e.g. Hong Kong) investor, you may have to convert Hong Kong dollar or other currency(ies) into RMB when investing in RMB share classes and subsequently convert the RMB redemption proceeds and/or dividend payment (if any) back to Hong Kong dollar or such other currency(ies). You will incur currency conversion costs and you may suffer losses depending on the exchange rate movements of RMB relative to Hong Kong dollar or such other currencies.
- RMB share classes will generally be valued with reference to the offshore RMB (known as "CNH") rather than the onshore RMB (known as "CNY"). While CNH and CNY represent the same currency, they are traded in different and separate markets which operate independently. As such, CNH does not necessarily have the same exchange rate and may not move in the same direction as CNY.
- (For non-hedged RMB share classes) Depending on the exchange rate movements of RMB relative to the base currency of a fund and/or other currency(ies) of the non-RMB-denominated underlying investments of the fund,
(i) you may still suffer losses even if there are gains or no losses in the value of the non-RMB-denominated underlying investments; or
(ii) you may suffer additional losses if the non-RMB-denominated underlying investments of the fund fall in value.
Currency hedging risk (for hedged RMB share classes only)
- A fund may attempt to hedge the currency exchange risk of RMB against the base currency of the fund and/or other currency(ies) of non-RMB-denominated underlying investments of the fund. The costs of the hedging transactions will be reflected in the net asset value of the units of the hedged RMB share classes and therefore, as an investor of a hedged RMB share class, you will have to bear the associated hedging costs, which may be significant depending on prevailing market conditions.
- If the counterparties of the instruments used for hedging purpose default, investors of the hedged RMB share classes may be exposed to RMB currency exchange risk on an unhedged basis and may therefore suffer further losses.
- Furthermore, there is no guarantee that the hedging strategy will be effective and you may still be subject to the RMB currency exchange risk for non-hedged RMB share classes mentioned above.
- Whilst the hedging strategy may protect you against a decline in the value of the fund's base currency and/or other currency(ies) of non-RMB-denominated underlying investments relative to RMB, on the other hand you will not benefit from any potential gain in the value of the hedged RMB share class if the fund's base currency and/or other currency(ies) of non-RMB-denominated underlying investments of the fund rise(s) against RMB.
Investors may not receive RMB upon redemption of investments and/or dividend payments (if any)
- You should always read the offering documents carefully before investing so as to find out whether you will actually receive RMB redemption proceeds and dividend payments (if any).
- Due to the exchange controls and restrictions applicable to RMB, a fund may not be able to get sufficient amounts of RMB in a timely manner to meet redemption requests of RMB share classes and/or pay dividends (if any) if all or a substantial portion of its underlying investments are non-RMB denominated.
- Therefore, even if a fund aims to pay redemption proceeds and/or dividends to investors of RMB share classes in RMB, you may not receive RMB upon redemption of your investments or receive dividend payments in RMB. There is also a risk that payment of your redemption proceeds in RMB may be delayed when there is not sufficient RMB for currency conversion for settlement of the redemption proceeds.
- Depending on the nature of the fund and its investment objective, there may be other risk factors specific to the fund which you should consider. Before making an investment decision, you should always be aware of the risk factors set out in the offering documents and seek professional advice where necessary.
How do I know whether a non-RMB-denominated fund has a RMB share class?
You can find out the type(s) of share classes offered by a fund in its offering documents including the product key facts statement. You should note that different share classes may have different features (e.g. different currencies, distribution policy and fee structure) and therefore the risks associated with different share classes may be different.
What should I consider before investing in this type of product?
- You should note that the offer of RMB share classes by a fund does not necessarily mean that the fund itself is denominated in RMB and/or it has RMB-denominated underlying investments. Certain funds denominated in non-RMB currency may offer RMB share classes while they have limited or even no RMB-denominated underlying investments.
- Like investing in any product, you should always understand the nature, investment objective and strategy, key features, fee structure and risks of a fund and assess whether the fund is suitable for you in terms of your own investment needs and risk profile before making any investment.
- In particular, you should find out the fund's base currency and whether, and the extent to which, the fund will invest in any RMB-denominated underlying assets from the fund's offering documents; and consider how the currency exposure at different levels (i.e. base currency of the fund, share class currency and currency(ies) of the fund's underlying investments) may impact you as an investor of a RMB share class and other specific risks associated with RMB share classes. Depending on the nature of the fund and its investment objective, there may be other risk factors specific to the fund which you should also consider.
- You should also note that investment in RMB share classes may not necessarily bring you benefits arising from appreciation in RMB (if any).
- If in doubt, seek professional advice.