Regulators in mainland China and Hong Kong have authorized the first batch of ETFs to be cross-listed and tradable on each other’s markets.
Regulators have approved the first ETF cross-listings between mainland China and Hong Kong.
The move expands the existing Stock Connect programme, launched in November 2014, which allows international investors to trade securities listed on the Shanghai and Shenzhen exchanges, and mainland investors to trade securities listed on the Hong Kong stock exchange.
The idea of an “ETF Connect” mechanism between the two markets was floated as far back as 2016 but was thought to be floundering due to unspecified technical issues.
The trading arrangement appears to be coming to fruition, however, as Hong Kong’s Securities and Futures Commission (SFC) has approved the cross-listing of two Shenzhen-listed ETFs in Hong Kong while China’s equivalent agency, the China Securities Regulatory Commission (CSRC), has rubber-stamped the cross-listing of two Hong Kong-listed ETFs in Shenzhen.
Each new ETF listing will be structured as a feeder fund, run by a local asset manager, that invests at least 90% of its assets in a target ETF listed in the other market.
The Hong Kong-listed feeder ETFs will invest in their Shenzhen-listed target ETFs through the Renminbi Qualified Foreign Institutional Investor (RQFII) programme which allows foreign investors who hold an RQFII quota to invest directly in mainland China’s bond and equity markets.
The SFC did not disclose details about the underlying exposures provided by the Shenzhen-listed target ETFs.
Meanwhile, the Shenzhen-listed feeder ETFs will invest in their Hong Kong-listed target ETFs through the Qualified Domestic Institutional Investor (QDII) programme which allows mainland Chinese investors to access foreign markets.
According to the CSRC, the Hong Kong-listed target ETFs will track the Hang Seng China Enterprise Index and the S&P New China Industry (A-Share Cap) Index.
The Hang Seng China Enterprise Index is formed of 50 large-cap Chinese companies listed on the stock exchange of Hong Kong. The index is split between 40 H-shares and a total of 10 Red-chips and P-chips.
The S&P New China Industry (A-Share Cap) Index includes 300 of the largest Chinese companies in consumption- and service-oriented industries. All Chinese share classes are eligible for inclusion, though the total weight of A-shares companies is capped at 15% at each semi-annual rebalance.
Pent-up demand
The establishment of an ETF Connect highlights increasing cooperation between the capital markets of mainland China and Hong Kong and is expected to provide investors in both markets with more investment opportunities and product choices.
The launch has a good chance of success. A 2018 survey by ETF custodian and administrator Brown Brothers Harriman found that a majority of ETF investors in the region are eagerly awaiting the scheme’s roll-out.
Demand from mainland Chinese investors appears to be the greatest with some 90% of respondents indicating they are likely to invest in Hong Kong ETFs.