Investment involves risks. Please refer to the Explanatory Memorandum for details including the risk factors.
1. Investment and concentration risks
- You should be aware that investment in the Sub-Fund is subject to normal market fluctuations and other risks inherent in the Sub-Fund's assets. Accordingly, there is a risk that you may not recoup the original amount invested in the Sub-Fund or may lose a substantial part or all of your investment.
- The Sub-Fund's exposure to a single country (i.e. the PRC) subjects it to greater concentration risk. The Sub-Fund is likely to be more volatile than a broadly-based fund such as global or regional investment fund as it is more susceptible to fluctuation in value resulting from adverse conditions in a single country.

2. Risks associated with fixed income instruments
Interest rate risk
- Generally, the value of fixed income instruments is expected to be inversely correlated with changes in interest rates. Any increase in interest rates or changes in macro-economic policies in the PRC (including monetary policy and fiscal policy) may adversely impact the value of the Sub-Fund's fixed income portfolio.
Credit risk
- Investment in fixed income instruments, which are typically unsecured debt obligations and not supported by collateral, is subject to the credit risk of the issuers which may be unable or unwilling to make timely payments of principal and/or interest. In the event of a default or credit rating downgrading of the issuers of the fixed income instruments held by the Sub-Fund, valuation of the Sub-Fund's portfolio may become more difficult, the Sub-Fund's value will be adversely affected and investors may suffer a substantial loss as a result. The Sub-Fund may also encounter difficulties or delays in enforcing its rights against the issuers who will generally be incorporated in the PRC and therefore not subject to the laws of Hong Kong.
- Changing market conditions or other significant events, such as credit rating downgrades affecting issuers or major financial institutions, may pose valuation risk as in such circumstances, valuation of the Sub-Fund's investments may involve uncertainties and judgemental determinations as there is a possibility that independent pricing information may at times be unavailable. If such valuations should prove to be incorrect, the Net Asset Value of the Sub-Fund may need to be adjusted and may be adversely affected. Such events or credit rating downgrades may also subject the Sub-Fund to increased liquidity risk as it may become more difficult for the Sub-Fund to dispose of its holdings of bonds at a reasonable price or at all.
Risks of investing in PRC bond markets and of unrated or below investment grade bonds
- The financial market of the PRC is at an early stage of development, and some of the bonds held by the Sub-Fund may be rated below investment grade or may not be rated by any rating agency of an international standard. Such instruments are generally subject to a higher degree of credit risk and a lower degree of liquidity, which may result in greater fluctuations in value. The value of these instruments may also be more difficult to ascertain and thus the Net Asset Value of the Sub-Fund may be more volatile. “Investment grade” is defined as a credit rating of AA or above as rated by any one of the Local Credit Rating Agencies.
Risk of credit rating downgrades
- Credit rating of issuers of fixed income instruments and credit ratings of investment grade securities may be downgraded, thus adversely affecting the value and performance of the Sub-Fund.
Risk of credit rating not the only selection criterion
- The credit rating of a bond is not the only selection criterion for investment by the Sub-Fund. Investors should therefore note that even if all the bonds the Sub-Fund invests in have an investment grade rating as of the date of this Explanatory Memorandum, there is no assurance that (a) such bonds will continue to have an investment grade rating, (b) the Sub-Fund will not invest in bonds that do not have an investment-grade rating in future; (c) such bonds will continue to be rated, and/or (d) the Sub-Fund will not invest in non-rated bonds in future. Moreover, the Manager may or may not, in its sole discretion, dispose of debt instruments that fall below a credit rating of AA. The Manager will take into account factors including liquidity and maturity date of the relevant debt instrument and market sentiment towards the debt instrument at the relevant time to determine whether (and when) disposing of a debt instrument that falls below a credit rating of AA is in the financial interest of the Sub-Fund.
Risks associated with local PRC credit ratings
- Some of the bonds held by the Sub-Fund may have been assigned an investment grade rating by a local credit rating agency in the PRC. Local credit rating agencies must be approved by the relevant PRC authorities to conduct ratings business and are also subject to industry self-regulation. However, the local PRC rating process may lack transparency and the rating standards may be significantly different from that adopted by internationally recognised credit rating agencies. There is little assurance that credit ratings are independent, objective and of adequate quality. In selecting the Sub-Fund's bond portfolio, the Manager may refer to credit ratings given by Local Credit Rating Agencies for reference but will primarily rely on its own internal analysis to evaluate each bond independently. Investors should also exercise caution before relying on any local credit ratings.
Risk associated with Urban Investment Bonds
- The Sub-Fund may invest up to 60% of its Net Asset Value in Urban Investment Bonds. Although these Urban Investment Bonds, which are issued by LGFVs, may appear to be connected with local government bodies, they are typically not guaranteed by such local government bodies or the central government of the PRC. As such, local government bodies or the central government of the PRC are not obligated to support any LGFVs in default. In the event that the LGFVs default on payment of principal or interest on the Urban Investment Bonds, the Sub-Fund could suffer very significant loss and the Net Asset Value of the Sub-Fund could be adversely affected.

3. Risk relating to the RQFII regime
- In the event of any default of either a PRC broker or the PRC Custodian in the execution or settlement of any transaction or in the transfer of any funds or securities in the PRC, the Sub-Fund may encounter delays in recovering its assets which may in turn impact the net asset value of the Sub-Fund.
- The RQFII policy and rules are new and there may be uncertainty to its implementation and such policy and rules are subject to change. The uncertainty and change of the laws and regulations in the PRC (including the RQFII policy and rules) may adversely impact the Sub-Fund and such changes may also have potential retrospective effect.
- Repatriations by RQFIIs in respect of fund such as the Sub-Fund conducted in RMB are not subject to any restrictions, lock-up periods or prior approval. There is no assurance, however, that PRC rules and regulations will not change or that repatriation restrictions will not be imposed in the future. Any restrictions on repatriation of the invested capital and net profits may impact on the Sub-Fund's ability to meet redemption requests from Unitholders.

4. Risks relating to the PRC
- Investing in emerging markets, such as the PRC, involves a greater risk of loss than investing in more developed markets due to, among other factors, greater political, tax, economic, foreign exchange, liquidity and regulatory risks.
- Investing in PRC-related companies and in the PRC markets involve certain risks and special considerations not typically associated with investment in more developed economies or markets, such as greater political, tax, economic, foreign exchange, liquidity, legal and regulatory risk.
- The concentration of the Sub-Fund's investments in PRC-related companies may result in greater volatility than portfolios which comprise broad-based global investments.
- There are risks and uncertainties associated with the current Chinese tax laws, regulations and practice in respect of capital gains realised by RQFIIs on its investments in the PRC (which may have retrospective effect). The Manager will at present make a provision of 10% for the account of the Sub-Fund in respect of any potential tax liability on capital gains. Such provision, however, may be excessive or inadequate to meet final PRC tax liabilities. In case of any shortfall between the provision and actual tax liabilities, which will be debited from the Sub-Fund's assets, the Sub-Fund's asset value will be adversely affected.

5. Liquidity risk
- China's bond market is still in a stage of development and the bid and offer spread of RMB bonds, whether traded on the inter-bank or listed bond market, may be high and the Sub-Fund may therefore incur significant trading costs and may even suffer losses when selling such investments.
- In the absence of a regular and active secondary market, the Sub-Fund may not be able to sell its bond holdings at prices the Manager considers advantageous and may need to hold the bonds until their maturity date. If sizeable redemption requests are received, the Sub-Fund may need to liquidate its listed bonds at a discount in order to satisfy such requests and the Sub-Fund may suffer losses.

6. RMB currency risk
- This Sub-Fund is denominated in RMB and all subscription money and redemption proceeds will be payable in RMB. There is no guarantee that RMB will not depreciate. Investors whose assets and liabilities are predominantly in Hong Kong dollars or in currencies other than RMB (being the currency in which the Units are denominated) should take into account the potential risk of loss arising from fluctuations in value between such currencies and RMB.

7. Dividends risk / Distributions payable effectively out of capital risk
- There is no assurance that the Sub-Fund will declare to pay dividends or distributions. Investors may not receive any distributions.
- The Manager may, at its discretion, pay dividend out of gross income while charging all or part of the Sub-Fund's fees and expenses to the capital of the Sub-Fund, such dividend may be treated as being effectively paid out of capital of the Sub-Fund. Payment of dividends effectively out of capital amounts to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment. Payment of dividends effectively out of capital may result in an immediate decrease of the Net Asset Value per Unit. The Manager may amend the policy regarding paying dividends effectively out of capital subject to the SFC's prior approval and by giving not less than one month's advance notice to Unitholders.