What is a "renminbi fund"?
- A renminbi fund generally refers to a fund that adopts renminbi as the base currency. Subscriptions and redemptions of units in the fund must be settled and paid in renminbi, unless otherwise stated in its offering and constitutive documents.
- Investors should read the offering document and the product key facts statement (Product KFS) of a renminbi fund carefully before investing in it, to understand the key features and risks of the renminbi fund.
What are the key risks involved in renminbi funds in general?
- Since a renminbi fund is denominated in renminbi, HK dollar-based investors are therefore exposed to fluctuations in the renminbi exchange rate against HK dollar. Like any currency, the exchange rate of renminbi may rise or fall.
- Renminbi is currently not freely convertible and is subject to exchange controls and restrictions.
Investors may not receive renminbi upon redemption of investments
- Due to the exchange controls and restrictions applicable to renminbi, a renminbi fund may not be able to get sufficient amounts of renminbi in a timely manner to meet redemption requests if a substantial portion of its investments are non-renminbi denominated.
- As a result, investors may not receive renminbi but other currencies when they redeem their investments in the renminbi fund.
Market / investment risk
- A renminbi fund is an investment fund product and not a bank deposit. In general, there is no guarantee of the repayment of principal or dividend payment.
- The underlying investments of a renminbi fund may fall in value and therefore your investment in the fund may suffer loss even if renminbi appreciates.
Underlying investments of a renminbi fund may not be renminbi denominated
- Currently, the access to stocks and bonds issued in mainland China by foreign investors is limited and only those foreign investors with a pre-approved investment quota (such as the Qualified Foreign Institutional Investors (QFII)) can invest directly in stocks and bonds issued in mainland China. (Note)
- For those renminbi funds that do not have access to an investment quota to invest directly in mainland China, their available choice of renminbi denominated investments outside mainland China is limited. The return of the renminbi fund may therefore be adversely affected.
- Also, a renminbi fund may have to invest in non-renminbi assets. In this case, the fund will be subject to the renminbi exchange rate fluctuations and bid/offer spreads in selling its non-renminbi assets to meet redemption requests and other capital requirements (e.g. settling operating expenses).
Note: The QFII is granted to foreign or international firms for them to invest directly in mainland China listed securities. However, those firms must remit foreign currency (like USD) into mainland China and convert into renminbi for investment. When they wish to liquidate, they must sell their investments, convert the renminbi proceeds received into their original currency and remit out. If a renminbi fund invests directly in mainland China via a QFII quota, it will involve multiple currency conversions (i.e. renminbi converted in US dollar, remitted into mainland China and then converted again to renminbi to invest, and vice versa when the fund wishes to liquidate their investments). The costs incurred in these currency conversions may seriously adversely affect the fund's return.
- A renminbi fund is exposed to the counterparty risk associated with the issuers of the instruments that the fund invests in. A renminbi fund may have concentrated exposure to issuers of a particular market/industry/sector.
- For those renminbi funds that rely on investment in derivate instruments to gain exposure to the mainland China market, they are in particular subject to counterparty risk of the derivative issuer(s). Default of any derivative issuer(s) may cause the fund to suffer substantial loss.
What are the additional risk factors concerning a renminbi fund (renminbi bond fund) that invests substantially in renminbi denominated bonds or other debt instruments issued outside mainland China (collectively, Offshore Renminbi Debt Instruments)?
Apart from the key risks as discussed above, investors of a renminbi bond fund shall pay attention to additional risks as follows:
Credit risk of counterparties
- Offshore Renminbi Debt Instruments can be issued by a variety of issuers, whether they are from inside or outside mainland China, including commercial banks, state policy banks, corporations etc. These issuers may have different risk profile and their credit quality may vary.
- Offshore Renminbi Debt Instruments are generally unsecured debt obligations not supported by any collateral. A renminbi bond fund will be fully exposed to the credit/insolvency risk of its counterparties as an unsecured creditor.
- As the mainland China's financial market is nascent, most of the Offshore Renminbi Debt Instruments are and will be unrated.
Limited availability of Offshore Renminbi Debt Instruments
- Investing in the Offshore Renminbi Debt Instruments does not require the holding of a QFII quota, however, there is currently limited source of Offshore Renminbi Debt Instruments. In the absence of sufficient Offshore Renminbi Debt Instruments for a renminbi bond fund to invest in, the fund may need to allocate a substantial portion of its assets in other investment holdings (such as bank deposits or non-renminbi denominated assets) which may adversely affect the fund's return. (see Note above)
- The Offshore Renminbi Debt Instruments are not regularly traded and an active secondary market for these instruments is yet to be developed. The renminbi bond fund may suffer loss in trading such instruments.
- The bid and offer spread of the price of Offshore Renminbi Debt Instruments may be large, the renminbi bond fund may incur significant trading and realisation costs and may suffer losses.
- In general, there is no guarantee on the rate of distribution of the net income by a renminbi bond fund. The distribution yield of a renminbi bond fund can be lower than the yield of holding the Offshore Renminbi Debt Instruments directly.
- The distributions of a Renminbi bond fund may be made out of capital rather than income, depending on the terms of the offering and constitutive documents.
What should investors consider before investing in renminbi funds?
- As an investor, you should always understand the nature, investment objective and strategy, key features and risks of a renminbi fund.
- When you invest in a fund, typically there are upfront subscription charges. As well, there is an annual management fee. You should understand how these fees and charges are charged and calculated, and consider how they may affect your investment return.
- A renminbi fund may not necessarily give you the benefits of appreciation in renminbi (if any). You may also receive redemption proceeds in a currency other than renminbi. Seek professional advice if in doubt.
How do I know if a renminbi fund is suitable for me?
- Before you make your investment decision, learn about the product features of the renminbi fund and know your investment objectives. In addition, according to the SFC's Code of Conduct, when SFC licensed persons and registered institutions solicit you or make a recommendation to you in relation to the renminbi fund, they must ensure its suitability for you, taking into account your personal circumstances, such as financial situation, investment experience and investment objectives.