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General view of Shenzhen in the Greater Bay Area on 12 May 2019. Photo: Martin Chan

Hong Kong, Shenzhen start cross-listing of ETFs, setting a milestone in the financial integration of the Greater Bay Area

  • The CSOP Yinhua CSI 5G Communications Theme ETF, a feeder fund that mirrors an exchange-traded fund (ETF) in Shenzhen, rose in Hong Kong trading
  • The Yinhua ICBC CSOP S&P New China Sectors ETF, was little changed in Shenzhen trading

Two feeder funds began trading on the Hong Kong and Shenzhen exchanges on Friday , adding to the portfolio of cross-border financial instruments now available to residents of the Greater Bay Area and setting a milestone in the region’s financial integration.

The CSOP Yinhua CSI 5G Communications Theme ETF, a feeder fund that mirrors an exchange-traded fund (ETF) in Shenzhen, rose to as much as HK$8.16 in Hong Kong trading, compared with its October 22 net asset value of 7 yuan (US$1.04). The Yinhua ICBC CSOP S&P New China Sectors ETF, a Shenzhen-traded financial instrument that mirrors a fund in Hong Kong, was little changed from its October 21 net asset value of 1 yuan.

The debut of the two cross-listed instruments expands the financial products in which investors of Hong Kong and mainland China – separated by a physical border and two different currencies – can now buy and sell. The scheme lets Hong Kong’s investors trade a Shenzhen-listed ETF through a feeder fund that mirror its performance. Conversely, investors in China can buy or sell a Hong Kong-listed ETF through a feeder fund set up by a Chinese manager in Shenzhen.

“Such pilot cross-listing ETFs underscore the priority and support given by the Chinese and Hong Kong governments on forging greater financial integration in the Greater Bay Area,” said Ding Chen, chief executive of CSOP Asset Management, one of the asset managers chosen for the landmark project. “We hope that cross-listing ETFs will become a market norm with more new launches by the industry.”

Ding Chen, chief executive officer of CSOP Asset Management, on 22 October 2020. Photo: Jonathan Wong

China maintains tight capital controls, which limits the avenue for overseas investors to access financial instruments on the nation’s exchanges, and similarly bars Chinese citizens and funds from trading offshore.

As of the end of July, there were 139 ETFs and other index-tracking products with a combined market value of HK$328 billion listed in Hong Kong. In the first seven months of the year, 13 new products listed in the city and more are in the pipeline.

Hong Kong Exchanges and Clearing Limited (HKEX), the exchange operator signed a memorandum of understanding on Friday with the Shenzhen Stock Exchange to promote the ETF cross-listing scheme and more connections of the two markets.

“Capital markets in Hong Kong and the Mainland have remained robust and resilient through recent challenging times, and today we are celebrating our shared strengths,” the HKEX’s chief executive Charles Li Xiaojia said in a statement. “The signing of the MOU is an important step forward in building valuable financial connections within the Greater Bay Area.”

Access to stocks listed in Hong Kong is possible only through the so-called Connect cross-border investment channels. A cross-traded ETF would lower the financial barrier – currently at 500,000 yuan – for mainland Chinese investors, making it easier and cheaper for them to access foreign markets.

The expansion of the cross-listing arrangement could give a much-needed boost to the transactions of Hong Kong-listed ETFs, which declined 26 per cent in August from a month earlier to a daily average of HK$5.6 billion, the lowest this year.

Global asset managers had been relocating their businesses to mainland China to tap the massive hoards of household savings in an expanding Chinese middle class looking for investible options. BMO Global Asset Management of Canada was reported in September to be selling its seven Hong Kong-listed ETFs to another manager. A month earlier, the US asset manager Vanguard decided to exit its ETF business and close its Hong Kong office, which count six listed on the city’s bourse.
The regulators of Hong Kong and China have unveiled various cross-boundary pilot schemes aimed at promoting closer financial cooperation in the Greater Bay Area, one of them being the wealth management connect scheme that would enable Hong Kong and Macau residents to buy onshore wealth management products sold by Chinese banks, while residents in the Guangdong provincial cities in the bay area can invest in products sold by Hong Kong and Macau’s banks.
Hong Kong’s Securities and Futures Commission gave its green light in August for two such ETFs to be created on the city’s financial market place.

The CSOP fund, which tracks the CSI 5G Communications Index covering equities related to 5G telecommunications technology on the Shanghai and Shenzhen exchanges, raised US$5 million from institutional investors, Ding said.

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