Beginning July 1st, China and Hong Kong will have cross-border sales of funds. Investors took the view that cross-border sales of mutual funds will increase inflow of equity. In a joint statement, China and Hong Kong regulators said the initial quota would be $97 billion, which is to be equally split between both. This decision will improve access to capital as well as financial markets.

“Mutual recognition would enable Chinese asset-management firms to sell their products to offshore investors, while giving their foreign counterparts direct access to the Chinese market. International managers previously tapped China’s growing personal wealth by teaming up with local companies for mutual-fund joint ventures in the country,” reported Bloomberg.

This is one of China’s latest series of efforts to bolster the economy. China’s benchmarks soared in 2014 and have maintained the winning momentum in 2015. The CSI 300 increased 3% last Monday, moving above the 5,000 mark for the first time since 2008.

Also, Chinese stocks enjoyed strong gains as China’s policymakers declared the guidelines for reform priorities in 2015. Beijing is now keen to open up the country's capital markets.

Deepening Reform Plans for Crucial 2015

The reform guidelines were drafted by the National Development and Reform Commission. The State Council, the country’s cabinet, approved the guidelines, which calls 2015 “a crucial year for deepening reform”.

The statement noted: “More focus will be placed on promoting financial reforms to push forward the development of the real economy”. This highlights the capital market reforms that China has been serious about since last year. China’s reforms now range from streamlining administrative processes to focusing on the importance of boosting the yuan's role globally. The reforms look to further open up the financial sector to domestic and foreign investors.

The reforms highlight the Shenzhen-Hong Kong stock connect. In Nov 2014, trading link between Hong Kong and Shanghai was approved. The so-called Shanghai-Hong Kong Stock Connect program allowed retail investors around the globe to invest in mainland Chinese equities for the first time. It will likely result in more capital inflows into the country and certainly lift its dwindling economy.

The other reform areas targeted include “state enterprises, taxation, deposit rates, the initial public offering system, and boosting the global status of the yuan among others,” reported Reuters. Also, the country’s state-planning agency approved six rail projects that will see investments worth $39.3 billion.

Low Growth & Stimulus Measures

China’s markets may still move further up despite the strong gains already achieved. Investors have cheered the three rate cuts since November and they are looking for more stimulus measures.

Stimulus measures are all the more necessary given that the economy is seeing slower growth. China’s economy expanded at its slowest pace in 24 years in 2014. The National Bureau of Statistics of China had reported first quarter GDP (preliminary estimate) to have registered 7% year-on-year growth. However, some experts alleged that the actual growth was much worse.

Meanwhile, China’s political leadership has expressed satisfaction with a lower level of growth. The country seeks a path of slower but sustainable prosperity. China is making efforts to transform into a self-sustaining economy banking on domestic consumption. Employment and services have been attributed to be the bright spots, and slowdown is stabilizing according to Vice Premier Zhang Gaoli. Premier Li Keqiang had reassured that his government would take further steps to manage the economic situation.

However, the government has responded proactively to the series of dismal economic reports. In November, the People’s Bank of China (PBOC) announced its surprise decision to reduce interest rates. This was the first reduction in rates undertaken in more than two years. In next six months, there were 2 more rate cuts.

The government continues to undertake several reform measures targeted at specific sectors to boost growth. This includes increasing the pace of reforms of state-owned companies as well as relaxing property purchase and lending norms.

2 Funds to Buy Now

Here we will list 2 China mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds also have encouraging year-to-date, and 3 and 5-year annualized returns.

Fidelity China Region (FHKCX - MF report) invests a large share of its assets in equity securities of companies whose principal operations occur in the Greater China Region. A maximum of 35% is invested in industries that account for over 20% of Hong Kong, Taiwanese, and Chinese market. Factors such as financial strength and economic conditions are considered to invest in a company.

Fidelity China Region currently carries a Zacks Mutual Fund Rank #1. This Fidelity fund has soared 29.9% year to date and the 3 and 5-year annualized returns stand at 26.8% and 15.6%, respectively. FHKCX carries no sales load and the annual expense ratio of 1.01% is lower than the category average of 1.78%.

Matthews China Dividend Investor (MCDFX - MF report) seeks total return and prioritizes providing current income. MCDFX invests a lion’s share of its assets in dividend-paying equities of firms located in China, including the administrative and other districts like Hong Kong.

Matthews China Dividend Investor currently carries a Zacks Mutual Fund Rank #2. This Mathews fund has soared 33% year to date and the 3 and 5-year annualized returns stand at 22.2% and 15.7%, respectively. MCDFX carries no sales load and the annual expense ratio of 1.19% is lower than the category average of 1.78%.