The newly announced inclusion of exchange-traded funds (ETFs) in mainland China's stock connect scheme with Hong Kong will help consolidate the city's role as a financial hub and bridge between China and the rest of the world, according to experts.
The China Securities Regulatory Commission (CSRC) and Hong Kong Securities and Futures Commission have reached an in-principle agreement on the inclusion, with the goal of deepening mutual market access between the mainland and Hong Kong, according to an announcement posted on the CSRC website on Friday night.
Official implementation of the proposal will come in about two months, according to CSRC.
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"The implementation of mutual access of ETFs marks another milestone in the continual integration of the two capital markets," Hong Kong Chief Executive Carrie Lam was quoted as saying in a government statement on Friday.
In the same statement, Financial Secretary Paul Chan said it promotes liquidity as well as sustainable development of the ETF markets on both sides of the border. "The initiative also promotes the further opening up of the mainland financial market, and at the same time, consolidates Hong Kong's role as the gateway and the bridge for flows of international and mainland capital."
"The inclusion of the ETFs into the stock connect schemes can be seen as a gift by Beijing to Hong Kong to celebrate the handover anniversary," said Christopher Cheung Wah-fung, vice-chairman of the Business and Professionals Alliance for Hong Kong (BPA), a pro-Beijing political group in the city.
It follows announcements of other financial connect programmes which were considered "gifts" on previous handover anniversaries, including the northbound bond connect in July 2017, and Wealth Management Connect scheme in June 2020.
On Friday, the CSRC also released draft regulatory guidelines listing criteria for the ETFs that can join the programme.
Those on the mainland need to maintain an average daily assets under management (AUM) level of 1.5 billion yuan (US$223.93 million) over the past six months, with their components mostly listed in Shanghai and Shenzhen. The ETFs in Hong Kong must have a daily average AUM of at least HK$1.7 billion (US$216.5 million), while their underlying assets listed in Hong Kong.
The launch will add more capital to both the onshore and offshore ETF markets, said Alan Li, portfolio manager at Atta Capital in Hong Kong. "The trading cost of ETFs is lower than trading stocks. That will attract not only more retail investors, but also institutional investors who can find an extra [avenue] for cross-border investment."
Stock Connect, launched in 2014, was seen as an important step in the opening up of the mainland market by allowing cross border trading between the stock markets of Hong Kong and Shanghai. A Shenzhen leg was added in 2016.
Stock connect gave mainland Chinese investors access to home-grown stars such as Tencent Holdings, while giving Hong Kong and global investors the ability to invest in high fliers such as liquor giant Kweichow Moutai.
The latest proposal also lets mainlanders invest in ETFs holding secondary listings in Hong Kong, such as Alibaba Group Holding and Baidu, which was not permitted under the current connect schemes. (Alibaba owns the Post).
ETFs which track main indexes such as the Hang Seng Index, Hang Seng China Enterprise Index and Hang Seng Tech Index could be selected in the first batch, Li said.
The Tracker Fund of Hong Kong, Global X Hang Seng High Dividend Yield ETF and the Ping An of China CSI HK Dividend ETF could also be included, said Gary Ching, Hong Kong-based chief analyst for macroeconomics and strategy at Guosen Securities.
"Now it's hard for offshore investors to invest in China's specific industries [but] the new ETF scheme will allow them to do so," Ching said. "Because the ETF volume will be calculated into the overall stock trading volume, it will stimulate the stock markets and help ease capital outflows amid a weaker yuan."
The Tracker Fund of Hong Kong could also be included in the new ETF proposal, according to analysts. Photo: AFP alt=The Tracker Fund of Hong Kong could also be included in the new ETF proposal, according to analysts. Photo: AFP>
The northbound trading of stock connect has injected net capital inflows of 1,600 billion yuan into the mainland stock markets, while southbound trading has brought more than HK$2,300 billion into the Hong Kong market, according to the Hong Kong government.
"It is a real breakthrough for the cross border trading scheme," said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers. "The inclusion of ETFs into the stock connect schemes will benefit tech stocks ETF the most [because] many tech stocks are not yet qualified to be traded in stock connect, but investors can invest in these companies via the ETF."
Hong Kong Exchanges and Clearing (HKEX) said that for many investors ETFs are a "cost-efficient investment option and a popular choice for diversification".
"ETF inclusion in stock connect will be mutually beneficial to both Mainland China and Hong Kong's capital markets, supporting the continued sustainable growth of both, at a time when participants and customers are demanding ever more and better connectivity," HKEX CEO Nicolas Aguzin said in a statement.
