Regulators approve Hong Kong-China ETF Connect after long delays

Hong Kong and mainland Chinese regulators have announced they finally have come to an agreement for the long-awaited inclusion of exchange traded funds into the Stock Connect programme after years of multiple missed deadlines.

Initial eligibility requirements have been outlined, including limiting Hong Kong-listed ETFs to those with at least HK$1.7bn ($217mn) in assets over the past six months, and only including products that track indices that primarily track Hong Kong-listed stocks.

The China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission said in a joint statement that mainland and Hong Kong investors will be permitted to trade eligible ETFs listed on each other’s exchanges through the use of local securities firms or brokerages.

“To expand the variety of traded products and provide more investment opportunities and convenience for domestic and overseas investors, the CSRC and the SFC reached a consensus to include ETFs as eligible securities under Stock Connect in 2016,” the announcement said.

This article was previously published by Ignites Asia, a title owned by the FT Group.

However, the two regulators noted that it would take at least a further two months for the ETF Connect for the scheme to go live and for investors to start using the facility.

Before eligible ETFs can be included in the Stock Connect programme, trading and clearing rules and systems have to be finalised, regulatory approvals granted, and market participants must have adapted operational and technical systems, according to the statement.

In addition, arrangements for cross-boundary regulatory and enforcement co-operation have still to be put in place and investor education measures have still to be determined, the statement added.

When the prospect of an ETF Connect was first proposed in 2016 allowing global providers to sell Hong Kong-listed ETFs to the massive, fast-growing Chinese market, it sparked a rush of new entrants.

ETFs listed on the Shanghai Stock Exchange held a record Rmb1.14tn ($180bn) in assets as of end-2021, a rise of 26 per cent over the year, with the percentage of ETF-only retail investors who made a profit last year surpassing those who invested in both stocks and ETFs.

But with the launch of the scheme delayed for many years, interest has waned and fears have also grown that strict eligibility requirements for participating ETFs would be introduced at the initial stage.

On Friday, stock exchanges in Hong Kong and mainland China revealed the eligibility criteria for ETFs that will be allowed to participate in the ETF Connect.

The Stock Exchange of Hong Kong announced that in order to be eligible for the scheme, “southbound” ETFs regulated in Hong Kong must be traded in Hong Kong dollars and maintain daily average assets under management over the past six months of at least HK$1.7bn.

No synthetic ETFs or leveraged and inverse products will be permitted, and the benchmark used must have been launched for at least one year.

There are also required minimum weightings for constituents listed in China and Hong Kong and other index requirements.

The concern for some in the industry is likely to be that the initial investment limitation does not offer ETF investors in Hong Kong or China anything that they cannot already access via existing products from local firms.

Ashley Alder, chief executive of Hong Kong’s SFC, warned the industry last month that the eligibility of the ETF products to be first included in the long-delayed scheme will be limited by their fund size, turnover and the index they track.

“The scope of ETF Connect may look narrow at first, but I hope that eligibility will be relaxed as the programme gains traction,” Alder said at the annual China Capital Markets conference.

Alder said in his speech that the first iteration of the ETF Connect upon launch would follow a “pilot” approach and would aim to “test the waters”. He urged asset managers keen to participate in a wider scheme not to be overly anxious. “Here patience is a virtue,” he added.

The latest developments come six months after Hong Kong and mainland financial regulators and major stock bourses said that they had reached an agreement to add ETFs to the existing Stock Connect schemes linking the two markets and around eight years after the launch of Stock Connect.

Complications over operational procedures, including aligning clearing and settlement cycles that differ across the three exchanges, redemption and creation methods of ETF shares, as well as holiday trading settlement arrangements across different exchanges, have delayed the launch of the ETF Connect and severely dented enthusiasm for the scheme.

At the start of this year, Ignites Asia spoke to several industry professionals in Hong Kong, none of whom were confident that there would be strong initial investment flows, with many pointing to the need to include a strong variety of products to ensure success.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.