Stock Connect expected to unleash pent-up ETF demand in Greater China

May 3rd, 2018 | By | Category: Equities

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Some 90% of mainland China investors are likely to invest in Hong Kong ETFs when they are included in the China-Hong Kong Stock Connect, according to a survey by ETF custodian and administrator Brown Brothers Harriman (BBH).

Chris Pigott, head of Hong Kong ETF servicing at Brown Brothers Harrimon.

Chris Pigott, head of Hong Kong ETF servicing at Brown Brothers Harriman.

The China-Hong Kong Stock Connect programme allows international investors to trade securities listed on the Shanghai and Shenzhen exchanges, and mainland investors to trade securities listed on the Hong Kong exchange.

While ETFs are not currently part of the Stock Connect programme, regulators are planning their future inclusion as early as Q4 2018.

As part of its inaugural Greater China ETF Survey, BBH surveyed 100 financial intermediaries and institutional investors from the mainland, Hong Kong and Taiwan – all of whom were invested in ETFs.

The results of the survey imply that the potential inclusion of ETFs in Stock Connect would likely unleash pent-up demand for Hong Kong ETFs from mainland Chinese investors.

“The inclusion of ETFs in Stock Connect will open another cross-border channel for mainland investors to deploy their capital and further diversify their investment outside the mainland.”
Chris Pigott, BBH’s head of Hong Kong ETF servicing

Chris Pigott, BBH’s head of Hong Kong ETF servicing, commented, “Regulatory reform has helped spur the growth of ETFs in the US and Europe. The inclusion of ETFs in Stock Connect will open another cross-border channel for mainland investors to deploy their capital and further diversify their investment outside the mainland. This development presents a significant opportunity for regional and global asset managers.”

The survey also pointed to strong ETF investment growth across Greater China in 2018 and an uptick in investor demand for products with diversified exposure. While 43% of mainland investors plan to increase their ETF holdings, 65% of investors surveyed in Hong Kong and Taiwan are looking to increase their ETF exposure.

Additional trends uncovered through the research were the growing importance of ESG (environmental, social, and governance) and smart beta investing.

Nearly half (48%) of mainland investors said they consider ESG factors “very important” to their investment decisions, while the number was notably higher in Hong Kong (60%) and Taiwan (75%).

When asked about their smart beta usage, a majority of respondents in Hong Kong (58%) and Taiwan (60%) said they plan to increase their use of smart beta ETFs over the next 12 months. However, only 38% of mainland investors plan to do so.

BBH concludes that there are challenges that need to be overcome to support the growth of ETFs in the region. Of the investors who aren’t planning on increasing their ETF investment this year, 41% highlighted education and 39% noted trading cost as the main reasons for not doing so.

“Some investors are put off by low trading volumes,” said Pigott. “Liquidity continues to be an area of focus for investors as some products in Greater China don’t have heavy volumes and a number don’t trade significantly on a daily basis, but the underlying assets they are invested in are liquid. Education could be a key to unlocking future growth.”

The firm further notes that distribution incentives and commission-based fee structures continue to be widely utilized, which don’t align with the low-cost nature of ETFs, and retail adoption is a small allocation of total investment.

However, BBH believes it is clear that ETF adoption in Greater China is a question of “when” not “if”, and given the survey results and forthcoming regulatory initiatives, it expects “when” to be sooner rather than later.

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