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A woman walks past the Shenzhen Stock Exchange on August 17, 2020. ETFs listed on the exchange will be available to Hong Kong investors starting Monday. Photo: Getty Images

Hong Kong investors gain access to US$89.6 billion in China-based ETFs as expansion of Stock Connect scheme kicks in

  • The ETF Connect is being hailed as part of a “gift package” that marked the 25th anniversary of the city’s handover to Chinese sovereignty
  • Move further entrenches Hong Kong as a global financial centre, while also giving onshore traders access to Hong Kong-based ETFs, analysts say

Hong Kong’s stock market is taking a step forward in cross-border integration with its mainland counterparts by inaugurating the trading of exchange-traded funds (ETFs).

Starting on Monday, global fund managers will be able to buy into 83 ETFs with a combined value of about 600 billion yuan (US$89.6 billion) on the Shanghai and Shenzhen exchanges through the Stock Connect programme. Meanwhile, China’s onshore traders will be able to access four Hong Kong-based products, including the Tracker Fund and CSOP Hang Seng Tech Index ETF.

The move is an upgrade of the Stock Connect scheme, which started in 2014 and has become a primary conduit for overseas investors to buy yuan-based stocks and for mainland traders to access offshore stocks in Hong Kong. It is also hailed as part of a “gift package” that marked the 25th anniversary of the city’s handover to Chinese sovereignty.

The ETF inclusion is expected to solidify Hong Kong’s position as the world’s third-largest stock market and a global fundraising hub, as the closer links with the mainland and policy support from Beijing entice more investors and boost liquidity. On top of the Stock Connect, the city has also established similar cross-border schemes that allow investors on the two markets to buy bonds and wealth-management products.

An aerial view of Hong Kong’s western Kowloon in August 2019. The addition of ETF trading further cements the city’s importance as a global financial hub, industry insiders say. Photo: SCMP / Roy Issa

“It’s a good development clearly, in that it secures Hong Kong’s position as an international financial centre in attracting more domestic mainland money for wealth management and for investments,” said Jack Siu, chief investment officer for Greater China at Credit Suisse in Hong Kong.

An ETF is a basket of underlying securities, including stocks, commodities and other asset classes, that investors can buy and sell on an exchange like an ordinary stock.

ETFs have emerged as popular investment options globally because of their good track record of outperforming actively managed funds. Most ETFs issued in Hong Kong and the mainland are passive index funds.

Will Hong Kong remain a global financial centre?

A total of 694 ETFs valued at 1.5 trillion yuan trade on the mainland’s two bourses, with the size increasing 30 per cent last year, according to data from Shenwan Hongyuan Group and Huachuang Securities. That compares with the total market capitalisation of 84 trillion yuan for China’s onshore market.

Hong Kong’s ETF market is much smaller, hosting only 150 such funds with HK$405.9 billion (US$51.7 billion) in assets under management, data by Huaxin Securities shows.

The city’s history of ETFs dates back to 1999, with the launch of the Tracker Fund, which started out as a stabilisation fund created by the Hong Kong government during the Asian financial crisis. It is the city’s biggest and most liquid ETF, with HK$116 billion in assets. It mirrors the performance of the Hang Seng Index.

The first batch of the 83 mainland-traded ETFs to be added to the Stock Connect will mainly give foreign investors exposure to a variety of China’s strategic emerging industries, including green energy, biopharmaceuticals and high-end manufacturing. They all meet the regulatory requirement of having a daily average of 1.5 billion yuan in assets under management for the preceding six months. The threshold for the four Hong Kong-domiciled EFTs is HK$1.7 billion.


SCMP Explains: Hong Kong’s Tracker Fund

SCMP Explains: Hong Kong’s Tracker Fund

“The ETF investment is very transparent and important for offshore investors, especially those who don’t know China well,” said Xu Meng, executive director of quantitative investing at China Asset Management in Beijing. “For investors who don’t have the research capability on individual Chinese stocks, the ETF investment is a better option.”

China Asset Management has 10 ETFs that are qualified for trading through the Stock Connect starting on Monday.

The initial impact on China’s yuan stocks may be limited. Huachuang Securities estimates that overseas buying of the 83 ETFs will only boost total stock transactions by 0.2 per cent, noting that ETF trading accounts for only about 4 per cent of turnover now.

The significance of the ETF Connect lies in “the further opening-up of the mainland’s capital market and further entrenchment of Hong Kong as a global finance centre,” said Yu Tianxu, an analyst at Wanlian Securities.

Hong Kong’s market, which is capitalised at US$5.6 trillion, is likely to benefit more than China’s markets from the strengthened link with the mainland, given the influence of mainland buying, which according to Citic Securities makes up more than 10 per cent of Hong Kong’s daily trading value.

For mainland traders, a big attraction of the Hong Kong ETFs is indirect access to the likes of Alibaba Group Holding and Baidu, which are currently unavailable for trading via the Stock Connect because their primary listings are in the US.

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Meanwhile, more participation by onshore investors will probably add more fuel to a run-up on local stocks that started in mid-March. The Hang Seng Index has risen 19 per cent in that span, while the Hang Seng Tech Index has added 40 per cent.

“I am optimistic that the beginning of this will set a framework, just like the Bond Connect and the Stock Connect,” said Siu at Credit Suisse. “Once the framework is set in place and over time, that should expand the position of Hong Kong as the key wealth-management centre for the Greater Bay and the entire country.”

With additional reporting by Cheryl Heng and Iris Ouyang.