Regulatory tightening continues: Where will the 200 billion cross-border investment demand flow?

Cross-border investment regulation is continuing to tighten.

On June 1, the State Council issued the Regulations of the State Council on Outbound Investment. It mentions that illegal income from conducting outbound investments prohibited by the state will be confiscated; the entities involved and the responsible individuals will also face fines. On May 22, the CSRC and eight other departments jointly issued the Implementation Plan for Comprehensive Rectification of Illegal Cross-border Securities and Futures Fund Business Activities. Under the plan, authorities issued a total of more than 2.2 billion yuan in fines to three overseas broker-dealers—Futu, Tiger, and Changqiao—and clarified that illegal business in the Chinese mainland must be fully exited within two years.

According to calculations by CITIC Securities, the scale of assets of affected accounts is approximately HK$200 billion–HK$250 billion. Against this backdrop, where will cross-border investment demand go? For domestic investors, future overseas investment will need to be conducted through legal channels such as Stock Connect, Qualified Domestic Institutional Investors (QDII), and Cross-border Wealth Management Connect.

What is worth noting is that the strong demand for cross-border investment has already triggered chain reactions in related investment products. Caijing statistics based on Wind data show that, as of June 2, more than 60% of QDII funds across the entire market have either imposed purchase limits or suspended subscriptions. Several cross-border listed funds have also warned of premium risks. The premium rates of the China-Korea Semiconductor ETF—Huatai-PB Ruitai (an ETF) and Invesco Nasdaq Technology ETF (Invesco) are both around 20%, forcing them to issue consecutive trading halt warnings to alert investors to risks.

In addition, to address problems such as difficulty in querying QDII quotas and lack of transparency, multiple fund distribution platforms have launched query services. On June 2, multiple distribution channels, including Tencent Wealth Management (Tencent Licai Tong), JD Finance, and China Merchants Bank, rolled out small tools for QDII quota inquiries. This enables investors to track changes in overseas fund subscription quotas in real time.

QDII Fund Supply and Demand Imbalance

QDII funds are a major channel for individuals to allocate overseas assets and also a key vehicle for absorbing returned capital. However, in the QDII space, investors have long faced two major problems. On the one hand, due to foreign exchange quota controls, products often suspend subscriptions, and premiums for popular funds traded in the market remain high. On the other hand, overseas market information is complicated and underlying assets are scattered, making it difficult for ordinary investors to identify high-quality QDII funds.

According to Wind data statistics by Caijing, among QDII funds that are still eligible for subscription, 36 funds have generated returns exceeding 50% since the beginning of this year. However, constrained by QDII quotas, they are all in a state of suspension for large-amount subscriptions, with the minimum daily subscription limit as low as 10 yuan.

From the geographic distribution of holdings of the above funds, the proportion allocated to U.S. stocks varies widely, ranging from as low as 30% to as high as 80%. Some funds hold a relatively high proportion of A-shares, including multiple products such as Tianhong Global High-End Manufacturing and E Fund Global Growth, with A-share allocation ratios exceeding 30%. Some products also combine diversified allocations including Hong Kong stocks, Taiwan stocks, and Korean stocks.

“I thought I bought cross-border products, but it turned out to be A-shares.” Recently, many investors on Xiaohongshu have complained about the low “U.S. stock purity” of certain QDII funds.

Comprehensive restrictions on large subscriptions for popular products further amplify premiums in the secondary market. Wind data shows that, as of June 2, 18 QDII funds had premium rates exceeding 9%. Their tracking underlying assets include the Nasdaq, crude oil, China-U.S. and Hong Kong internet themes, semiconductors, and more.

The QDII fund with the highest year-to-date return is the China-Korea Semiconductor ETF—Huatai-PB Ruitai, with a year-to-date return of 95%. Its intraday (in-market) premium rate is approximately 20%.

The China-Korea Semiconductor ETF—Huatai-PB Ruitai has attracted so much attention due to two factors: first, the explosive cycle of the AI industry; second, the product’s scarcity. This fund is the only ETF in the A-share market that directly invests in the Korean market. It tracks the CSI Korea Exchange (Korea Exchange) Korea Semiconductor Index and covers core semiconductor companies in both countries. Its top three holdings are Samsung Electronics, SK Hynix, and Cambricon (Cambrian). Among them, Samsung Electronics and SK Hynix together account for nearly 35% of the fund’s net assets.

Southbound ETF Connect Expansion

Compared with the pain points of QDII funds—limited subscriptions and high premiums in the market—Hong Kong Stock Connect has become the preferred route for cross-border investment allocation thanks to its institutional advantages. As the most direct and mature channel for allocating to Hong Kong stocks, Hong Kong Stock Connect covers more than 700 underlying assets, allows RMB settlement, does not consume foreign exchange conversion quota, and does not have the commonly seen issue of high in-market premiums typical of QDII funds.

At present, individual investors opening Hong Kong Stock Connect must meet two hard thresholds: their average daily securities assets in the first 20 trading days of the securities account must be no less than 500,000 yuan, and they must pass the suitability knowledge assessment for investors in the Hong Kong market. Hong Kong Stock Connect does not require complicated procedures such as opening an overseas account or foreign exchange approvals. After opening, investors can trade Hong Kong stocks directly using their existing A-share accounts.

In addition, under the Hong Kong Stock Connect framework, an ETF-exclusive investment channel has also been opened—Southbound ETF Connect—providing investors with a more flexible choice for allocating overseas assets. According to disclosures from the Hong Kong Exchanges and Clearing Limited, in recent years, trading volume of relevant Hong Kong Stock Connect ETFs has accelerated. In 2025, the average daily trading amount reached 3.9 billion Hong Kong dollars, up 61.7% year-on-year.

In the past two years, the product targets of Southbound ETF Connect have continued to expand. In November 2025, Southbound ETF Connect first expanded beyond the Hong Kong market, adding ETFs that allocate to U.S.-stock assets. The number of underlying assets increased from 17 to 23. Starting from May 6, 2026, eight Hong Kong-listed ETFs were added to the Southbound list, bringing the total to 31. The scope of underlying assets further extended to markets such as Korea, Japan, and Australia.

One highlight among the newly added expansions is the Southern East Fubon FTSE Hong Kong Korea Tech+ Index ETF, which has seen the largest inflow of funds among Southbound Connect ETFs in the past month. As the only ETF covering Korean tech stocks via Hong Kong Stock Connect, the Southern Hong Kong-Korea Tech ETF allocates about 65% to Hong Kong tech stocks and about 35% to core Korean tech assets. It is heavily weighted in global memory-chip leaders such as Samsung Electronics and SK Hynix. The fund’s list of major holdings also includes Hong Kong tech leaders such as SMIC, Alibaba, and Xiaomi.

In terms of market performance, Korea’s KOSPI index has risen by more than 108% cumulatively this year. Recently, Goldman Sachs raised its target level for KOSPI over the next 12 months from 9,000 points to 12,000 points. The Southern Hong Kong-Korea Tech ETF has gained 41.27% since the beginning of this year, ranking first among all Hong Kong Stock Connect ETFs.

Besides the Southern Hong Kong-Korea Tech ETF, the newly added cross-market funds in this round are also worth attention. The E Fund High Dividend ETF is currently the only high-dividend ETF in the Hong Kong Stock Connect ETFs that spans three markets. About 65% of its core positions are allocated to blue-chip assets such as Hong Kong Stock Connect financial and energy holdings, while 35% of its positions are invested in high-dividend companies in Japan and Australia’s mature markets. The E Fund AI ETF covers core AI-listed companies in Hong Kong and the U.S., selecting 50 constituents. Its top five holdings are Nvidia, Semiconductor Manufacturing International Corporation (SMIC), Hua Hong Semiconductor, Horizon Robotics, and Alibaba.

Mutual Recognition Funds Fill the Gap

While funds rapidly flow into Hong Kong Stock Connect Southbound ETFs, the high threshold of 500,000 yuan also discourages many investors. By contrast, mutual recognition funds have much lower participation thresholds, and they come with independent quota mechanisms that do not conflict with QDII quotas.

In simple terms, mutual recognition funds are a cross-border investment mechanism that allows overseas funds to be sold in mainland China and allows domestic funds to be sold abroad. They can be divided into two categories: Northbound funds and Southbound funds.

Wind data shows that there are currently 174 Northbound mutual recognition funds (counted separately for different share classes). Their investment scope covers major markets including Hong Kong, the Asia-Pacific region, and the U.S. Mutual recognition funds have extremely rich share-class settings, covering multiple currencies such as RMB, U.S. dollars, and Hong Kong dollars, and they include different types such as accumulated dividends and periodic dividend distributions.

Taking Morgan International Bonds as an example, it offers six types: Morgan International Bonds—PRC CNY Hedged Accumulated; Morgan International Bonds—PRC CNY Hedged Monthly Dividends; Morgan International Bonds—PRC CNY Accumulated; Morgan International Bonds—PRC CNY Monthly Dividends; Morgan International Bonds—PRC USD Accumulated; and Morgan International Bonds—PRC USD Monthly Dividends.

Among them, RMB share classes are subscribed and redeemed in RMB. The RMB hedged share classes further lock in exchange-rate risk based on the valuation basis, making them suitable for investors who do not want to bear FX volatility. USD share classes are subscribed and redeemed in U.S. dollars. Accumulated share classes reinvest dividends for investors who hold long term. Monthly dividend share classes distribute cash periodically, suitable for investors with cash flow needs. Among mutual recognition funds, products investing in Hong Kong, Asia, and the Asia-Pacific region are currently the mainstream.

Looking in more detail, for products whose investment region is mainland China and Hong Kong, the industry distribution is mainly financial services, healthcare, and telecom services. In addition, the top three holdings almost always include Tencent Holdings and/or Alibaba. Examples include Morgan Yian Hong Kong Fund, Hang Seng China Enterprises Index Fund, and Bank of China Hong Kong Stock Fund.

For products whose investment region is Asia and the Asia-Pacific region, the first largest holding is almost always TSMC. Samsung Electronics and SK Hynix also frequently appear in the top three holdings of these products, such as Oriental Wealth Hong Kong—Asia-Pacific New Power Dividend, Morgan Asia Stock High Dividend, and East Asia United Prosperity Asia-Pacific Multi-yield Funds.

In addition, for products whose investment region is global, with a focus on the U.S. market, the first largest holding is entirely Nvidia, and major holdings include U.S. high-tech companies such as Apple, Google, and Microsoft. Examples include Bank of China Hong Kong Global Stock Fund, Oriental Wealth Hong Kong—Flexible Allocation Growth M, and Pictet Strategy Income.

It should be noted that mutual recognition funds have slower redemption settlement; it usually takes 5–10 working days (and may take longer in extreme cases). However, their distribution channels are gradually expanding. At present, platforms such as Alipay and Tiantian Fund, as well as multiple banks, sell them.