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Hong Kong’s Secretary for Financial Services and the Treasury, James Henry Lau, said regulators were discussing the ETF Connect, but no timetable had been set. Photo: May Tse

Hong Kong-China ETF Connect back in the frame, as talks resume between market regulators

  • Regulators yet to decide what underlying assets will be permitted as part of connect mechanism
  • Another possibility being explored is cross listing of ETFs under Mutual Recognition Of Funds scheme

Hong Kong and mainland Chinese securities regulators have resumed talks about an ETF connect, with both sides looking to overcome the technical issues that have impeded the development of a fourth market access mechanism between the two markets.

Julia Leung Fung-yee, the deputy chief executive of Hong Kong’s Securities and Futures Commission (SFC), said on the sidelines of Monday’s Asian Financial Forum that the commission’s ongoing discussions with the China Securities Regulatory Commission (CSRC) also included the agenda of reaching a consensus on which exchange-traded funds (ETFs) will be included in the connect. The Hong Kong and China regulators have not yet decided what underlying assets they will permit as part of the mechanism. ETFs can track a number of underlying assets, including fixed income, stocks, precious metals, as well as technology indices.

“An ETF Connect is part of the original development blueprint for the Shanghai and Shenzhen stock connects. We are trying our best to explore the feasibility of establishing it [across the three stock exchanges],” Leung said.

The Shanghai and Shenzhen stock connects were launched in November 2014 and December 2016, respectively. They allow foreign investors outside China to trade A shares using accounts set up with Hong Kong Exchanges and Clearing, the city’s bourse operator. Chinese investors can trade Hong Kong stocks using their Shanghai and Shenzhen bourse accounts.

The third connect, a bond connect scheme, was launched in 2018. An ETF Connect will allow investors to buy funds, the bulk of which are index-tracking, passive funds.

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Leung said another possibility being explored was the cross listing of mainland China and Hong Kong-listed ETFs on each other’s markets under the Mutual Recognition Of Funds scheme. Struck between the SFC and CSRC in 2015, the scheme allows for eligible mainland and Hong Kong funds to be distributed in each other’s markets through a streamlined vetting process.

“Our goal is to maximise market demand for ETFs … we will consider whichever mechanism that works best,” Leung said, adding that the SFC was hoping to resolve some of these technical issues this year to facilitate the ETF Connect’s launch.

James Henry Lau, Hong Kong’s Secretary for Financial Services and the Treasury, who was present at the forum on Monday, also said regulators were discussing the ETF Connect, but no timetable had been set.

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The ETF Connect was shelved in 2018. Tim Lui Tim-leung, the SFC’s chairman, said at the time differences in trading and settlement mechanisms between Hong Kong and China were to blame.

As of September 2019, 156 providers had 1,719 ETF listed across Asia-Pacific, according to independent ETF research firm ETFGI. Hwabao CSI Technology Leading Enterprises ETF, listed on the Shanghai exchange, was the top ETF in the region excluding Japan by net inflow, amounting to US$549.7 million.

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