The Hong Kong and China cross-border investment channel for exchange-traded funds got off to a slow start but market players expect it to pick up steam once investors become familiar with the products offered.
Launched on July 4, the ETF Connect is an extension of the eight-year-old Stock Connect that allows investors in Hong Kong and China to invest in each other’s stock markets.
Trading volume of qualified ETFs listed in Shanghai or Shenzhen and traded in Hong Kong on the local bourse, known as the northbound channel of the scheme, was miniscule in the first week of launch.
Figures compiled by Broadridge Financial Solutions show just 222 million RMB (US$32.93 billion) of trading in the northbound channel, less than 1% of the 22 billion RMB total ETF transactions in China’s onshore ETF market.
There are 83 funds qualified for northbound trading, but only four in the southbound channel, where Hong Kong-listed ETFs are sold to investors in China. Trading volume in the southbound channel in the first week was HK$192 million ($24.6 million).
Bryan Liu, associate director at Broadridge, points out that the slow start mirrors that of Stock Connect, where it took many years from the 2014 launch for northbound trading to reach the current share of over 10% of transactions on the Shanghai and Shenzhen bourses. He says that’s because Chinese investors needed time to get accustomed to the products.
He lists several factors for tepid reaction to the ETF scheme.
“For instance, most institutional investors are not yet familiar with the new ETF Connect and not fully prepared with the related infrastructure, while retail investors are not familiar with the ETF products in each other’s market,” Liu tells Asia Asset Management (AAM).
Furthermore, he says the scheme may have been overshadowed by the launch of eight carbon-neutral ETFs in China in early July, which probably drew away investor attention.
Leo Chen, managing director and head of Asia at fund service provider Calastone, notes that most cross-border schemes between Hong Kong and China did not hit the ground running. Beijing then moved to gradually diversify the investment scope and product offerings, helping to divert capital flow into these schemes, including the Stock Connect.
“If the Chinese government looks at any cross-border scheme, they try to facilitate the gradual opening up of the market,” Chen tells AAM.
He expects the ETF Connect to be scaled up in future with the likely expansion of the southbound channel from the current handful. The four funds which are qualified now are the CSOP Hang Seng TECH Index ETF, iShares Hang Seng TECH ETF, Hang Seng China Enterprises Index ETF, and Tracker Fund of Hong Kong.
Southbound ETFs are required to have average daily assets under management of HK$1.7 billion over the past six months, and track indexes that mimic performance of Hong Kong-listed stocks.
Northbound ETFs must have daily average assets under management of 1.5 billion RMB over the past six months, and their benchmark indexes must have at least 90% of Shanghai or Shenzhen-listed companies.
