Regulators launch Hong Kong-China ETF Connect after long delays

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Regulators in Hong Kong and mainland China have announced that they have finally reached an agreement for the long-awaited inclusion of exchange-traded funds in the Stock Connect program after years of multiple missed deadlines.

Initial eligibility requirements have been set, including limiting Hong Kong-listed ETFs to those holding at least HK$1.7 billion ($217 million) in assets over the past six months, and only including products that track indices that primarily track Hong Kong-listed stocks.

The China Securities Regulatory Commission and the Hong Kong Securities and Futures Commission said in a joint statement that mainland and Hong Kong investors will be allowed to trade eligible ETFs listed on each other’s stock exchanges through securities companies. securities or local brokerage houses.

“To broaden the variety of products traded and provide more investment opportunities and convenience for domestic and foreign investors, CSRC and SFC reached consensus to include ETFs as eligible securities for Stock Connect in 2016. “, reads the press release.

This article was previously published by Ignite Asiaa security held by the FT group.

However, both regulators noted that it would take at least another two months for ETF Connect to go live and for investors to start using the facility.

Before eligible ETFs can be included in the Stock Connect program, trading and clearing rules and systems must be finalized, regulatory approvals granted and market participants must have suitable operational and technical systems in place, according to the release.

In addition, arrangements for cross-border regulatory and enforcement cooperation have yet to be put in place and investor education measures have yet to be determined, the statement added.

When the prospect of an ETF Connect was first offered in 2016, allowing global providers to sell Hong Kong-listed ETFs in the massive and rapidly growing Chinese market, it sparked a rush of new entrants.

ETFs listed on the Shanghai Stock Exchange held a registration Rmb 1.14 billion ($180 billion) in assets at the end of 2021, a 26% year-on-year increase, with the percentage of ETF-only retail investors making a profit last year exceeding those who have invested in both stocks and ETFs.

But with the program’s launch delayed for many years, interest has waned and fears have also grown that strict eligibility requirements for participating ETFs would be introduced at the initial stage.

On Friday, stock exchanges in Hong Kong and mainland China revealed the eligibility criteria for ETFs that will be allowed to participate in ETF Connect.

The Hong Kong Stock Exchange has announced that to be eligible for the program, “southern” ETFs regulated in Hong Kong must be traded in Hong Kong dollars and maintain an average daily assets under management over the past six months of at least 1 HK$.7 billion.

No synthetic ETFs or leveraged and inverse products will be permitted, and the benchmark used must have been launched for at least one year.

There are also minimum required weightings for components listed in China and Hong Kong and other index requirements.

Some industry players are likely concerned that the initial investment limitation does not offer ETF investors in Hong Kong or China everything they cannot already access through existing products from local companies. .

Ashley Alder, Managing Director of SFC Hong Kong, warned industry last month that the eligibility of ETF products to be included in the long-delayed program for the first time will be limited by their fund size, turnover and the index they track.

“The scope of ETF Connect may seem narrow at first, but I hope eligibility will be loosened as the program grows in popularity,” Alder said at the annual China Capital Markets conference.

Alder said in his keynote that the first iteration of ETF Connect when it launches will follow a “pilot” approach and aim to “test the waters.” He urged asset managers keen to participate in a broader program not to get too anxious. “Here, patience is a virtue,” he added.

The latest developments come six months after Hong Kong and mainland financial regulators and major stock exchanges said that they had reached an agreement to add ETFs to the existing Stock Connect programs linking the two markets and about eight years after the launch of Stock Connect.

Complications related to operational procedures, including the alignment of clearing and settlement cycles that differ between the three exchanges, methods of ETF share redemption and creation, as well as settlement arrangements for holiday trades on different exchanges, delayed the launch of ETF Connect and severely dented enthusiasm for the scheme.

At the beginning of the year, Ignites Asia spoke to several industry professionals in Hong Kong, none of whom were convinced there would be strong initial investment flows, with many emphasizing the need to include a wide variety of products to ensure success.

*Ignites Asia is an information service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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