China-Hong Kong ETF Link at Talks Stage as Eager Issuers Wait

  • CEO Charles Li says regulators need to reach agreement
  • Hong Kong market could grow 50%, according to one fund issuer

Exchange-traded fund firms are waiting for the start of a link that would let potentially millions of Chinese investors buy ETFs in Hong Kong, but the program is still at the discussion stage, according to the chief executive of the city’s stock exchange.

The addition of ETFs to Hong Kong and China’s stock connect program, which already has two links between the city and the mainland, is the subject of talks between the respective regulators, Charles Li, CEO at Hong Kong Exchanges & Clearing Ltd., said in an interview. The rules haven’t been agreed, and there isn’t a lot of pressure to reach a deal quickly, he said.

“The regulators need to find terms they are comfortable with for ETF connect,” said Li. “All options are on the table.”

Firms in Hong Kong are counting on selling their ETFs to Chinese investors to boost a market that’s roughly one-sixth the size of regional leader Japan. Pent up demand for offshore assets from the mainland -- where investors opened 295,000 trading accounts last week -- could see the former British colony outpace Japan’s $225 billion market if the program succeeds. An HKEX presentation from August 2016 said ETFs were planned to be included in the stock links this year.

Shanghai and Hong Kong started the first stock connect in 2014 and authorities added Shenzhen in December. Regulators announced a link for bond trading last month, and Li has spoken about another program, for initial public offerings, as the two markets pursue closer ties.

The different settlement regimes between the jurisdictions is one of the issues that will make it tough for the ETF link to start this year, Brian Roberts, head of exchange-traded products at HKEX, said in April.

“ETF issuers may be disappointed if there’s a long delay until late next year,” said Vincent Chen, head of index and quantitative investment at ICBC Credit Suisse Asset Management (International) Co., who manages the joint-venture’s China ETF in Europe.

Fund or Stock

Once the link is ready, authorities will need to decide if ETFs are categorized as funds or securities, a choice that could have major implications for the future of the market. 

Hong Kong and China started cross-selling funds in each others’ markets in 2015, but the program’s rules have meant that just six Hong Kong-based mutual funds are approved for sale on the mainland. The mutual recognition of funds, as it’s known, requires minimum asset size of 200 million yuan ($29.4 million) and a track record.

Li said that the mutual recognition framework has been mentioned in the talks. “Some people said, let’s do that, other people think that’s too restrictive,” he said.

If the rules were adopted for the ETF link, very few would be eligible to buy from the mainland, and they would mainly be China-tracking funds, according to Chen. Thirty-five of the roughly 130 Hong Kong-listed ETFs have more than 200 million yuan in assets, according to data compiled by Bloomberg.

The Tracker Fund of Hong Kong, which invests in benchmark Hang Seng Index members, is the largest ETF in the city and accounts for nearly one-third of the $34 billion market, the data show.

“There would be no point in Chinese investors using the connect program to access ETFs they already have,” said Chen. “I hope the requirements will be lower than those stipulated.”

If funds tracking major global indexes such as the S&P 500 Index, Nikkei 225 Stock Average and Euro Stoxx 50 Index are included, Hong Kong’s ETF market could grow as much as 50 percent in the first year, said Chen.

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