Taiwan's Financial Supervisory Commission (FSC) is inviting Andrew Sheng, chairman of Hong Kong's Securities & Futures Commission (SFC), to sign a memorandum of understanding that would recognize Taiwan mutual funds, allowing them to be marketed in Hong Kong, according to fund managers in Taipei.

The SFC has been invited to attend an international securities conference hosted by IOSCO in Taipei on February 24. The FSC extended the invitation earlier this month when its chairman, Kong Jaw-sheng, was in Hong Kong attending a funds conference hosted by the Investment Company Institute.

The move comes at the same time as the FSC is liberalizing rules for Taiwan-based mutual funds to invest in red chips and H- and B-shares from mainland China, which could make Taiwan funds more attractive to investors - local and foreign - seeking a Greater China exposure.

The SFC has yet to publicly respond to the invitation.

The MOU would have Hong Kong name Taiwan as a recognized funds jurisdiction, so that mutual funds domiciled there could also be registered and marketed in Hong Kong, and vice versa. Hong Kong now recognizes major markets such as the United States and Europe, but in Asia the only jurisdiction it recognizes is Indonesia.

The SFC has stated its intent to harmonize its regulations with those of mainland China but has otherwise remained mum on other regional initiatives.

The move would primarily benefit local houses, not global ones, and help internationalize the Taiwanese market at a time when the FSC is also throwing open the door to offshore fund managers, letting them operate freely in Taiwan. Domestic Taiwanese mutual fund companies are keen to expand their market access beyond the island's shores. Whether there exists demand in Hong Kong for Taiwanese firms is unclear; flows into regional equity or Taiwan country funds is modest.

This isn't tempering optimism among some local fund houses. Patrick Wong, vice chairman at Polaris International Securities Investment Trust, which launched Taiwan's first exchange-traded fund in mid-2003, believes Hong Kong-based investors keen to access the Taiwanese market cheaply would be interested in such a product.

If the MOU goes through, Taiwanese fund management companies would have to overcome the foreign exchange hurdle, establishing a platform or facility to let Hong Kongers invest in NT$-denominated funds.

Such a move would have less impact the other direction. Global houses with European-domiciled funds that are registered in Hong Kong can also register these in Taiwan. Few funds are actually domiciled in Hong Kong that could benefit from such an opening; most Hong Kong-based funds are specifically designed for the Mandatory Provident Fund regime.