Hong Kong shelves ETF Connect scheme with China due to ‘technical issues’, says SFC chairman

Hong Kong’s delayed ETF Connect scheme would be shelved because of “technical issues”, and regulators from the city and mainland China would turn their attention to launch cross listings of these index funds, according to newly-appointed Securities and Futures commission chairman Tim Lui Tim-leung.

“The trading and settlement methods for ETFs between Hong Kong, Shanghai and Shenzhen are all very different. It will need a very long period of discussion to establish the infrastructure to build an ETF Connect,” Lui, a former accountant, said in his first media briefing as chairman of the watchdog on Wednesday.

“As such, we have decided to shift our focus to launch the ETF cross listings.”

An ETF (exchange traded fund) is a fund that tracks a basket of stocks or assets. Listed ETFs are traded like stocks.

The scheme was expected to start in the second half of the year as the fourth cross-border trading programme between Hong Kong and the mainland. Two stock connects with Shanghai and Shenzhen were introduced in 2014 and 2016 respectively, while the northbound bond connect scheme was launched last year.

The current priority to introduce ETF cross listings follows the mutual fund recognition agreement struck two years ago between the SFC and the China Securities Regulatory Commission, in which CSRC-approved Hong Kong funds can be sold in the mainland and vice versa.

The cross listings will allow Hong Kong-based ETFs to list on the mainland exchanges and Chinese funds to do likewise in the city. The approval process, Lui said, would be similar to that of the mutual fund recognition scheme.

“We will, however, not abandon the idea to establish the ETF Connect, which remains on our agenda for longer term development,” he said.

For investors, the difference between an ETF connect scheme and a cross listing was less than what it would be for issuers, said Hong Kong Securities Association chairman Gary Cheung.

“The former does not require issuers to do anything, but the cross listings mean they will need to apply for secondary listings in another market, which will involve costs, and not all providers are willing to do so,” he said.

Hong Kong ETF market must build up ‘one-stop shop’ ahead of Connect launch, says bourse operator

Meanwhile, Lui said the SFC would continue to cooperate with the CSRC on regulating and enforcement of listed companies and brokers on the back of increased cross-border trading and presence of Chinese securities and fund management firms in Hong Kong. The two sides also signed more agreements recently to share information and conduct cross-border enforcement, and are expected to meet again next March after a meeting last month.

Mainland-backed financial firms in Hong Kong rose to 334 at the end of 2017, from the previous year’s 298, Lui said. In the first half of the year, mainlanders via the exchange links accounted for an average 13.4 billion yuan (US$1.7 billion) in trade for Hong Kong stocks, or 6.5 per cent of Hong Kong’s total market turnover.

Locally, since it began encouraging the public to report on market misconduct in October, the regulator has received reports of more than 80 cases, some of which, Lui said, were worth following up.

He said the SFC was also supportive of the Hong Kong Exchanges and Clearing’s public consultation next year on expanding the listing reform to allow corporate shareholders to hold premium class shares, currently restricted to founders or key executives, in the dual shareholding companies.

Hong Kong stock exchange defers consultation on further listing reform in latest blow to tech IPO ambitions

If implemented, it could boost Hong Kong’s effort to compete for tech listings with the US, where such structure is allowed.