Hong Kong, a British colony from the 1840s until 1997, grew into an international financial center off the coast of China. The equity connection was launched in 2014, followed by other systems linking the Hong Kong market closely to the mainland market.
Anthony Kwan | Bloomberg | Getty Images
BEIJING – China has joined the global frenzy over exchange-traded funds, the investment product that allows traders to buy and sell a basket of stocks.
The funds, known as ETFs, became very popular in the United States after the financial crisis, and created $3 trillion in business as BlackRock’s iShares ETF brand.
In mainland China, ETFs have multiplied faster than the stock market. In five years, the number of ETFs more than quadrupled to 645, while the number of shares rose only 53% to 4,615.
This is according to official data and a report by the Hong Kong Stock Exchange and Clearing, which also stated that the mainland ETF market has grown to 1.4 trillion yuan ($209 billion), more than tripled in just five years.
A regulatory change that took effect on Monday opened this ETF market to foreign investors via Hong Kong – a program called ETF Connect.
Beijing-based ChinaAMC, which said it launched the first mainland ETF in 2004, has acquired the industry boom and operates 10 eligible funds for trading under the new Cross-Border Trade Program. This includes indicators and manifestations of tracking ETFs such as semiconductor development.
ETF Connect is heavily skewed towards the mainland. Of the first batch of eligible ETFs, 83 were listed on the mainland, compared to just four in Hong Kong.
Goldman Sachs expects to buy an additional $80 billion of mainland assets against those in Hong Kong over the next 10 years.
“Adding Northbound ETFs to the A stock portfolio can expand effective limits and improve risk/reward,” Goldman Sachs analysts wrote in a report this week. “While the qualifying universe of Southbound appears narrow, the core components still expose mainland investors to broad-based internet and Hong Kong-listed financial stocks.”
Chinese internet technology giants like Tencent and Alibaba have listings in Hong Kong but not in the mainland. On the other hand, many China-focused companies are only listed on the mainland.
One of the things ETF Connect can do is to enhance international investors’ understanding of China’s ETFs and increase the impact of the products, Xu Meng, ChinaAMC fund manager, said in a statement. Xu is also the executive general manager of the company’s quantitative investment division.
ChinaAMC claims that by the end of 2021, it had more than 300 billion yuan of passively managed assets.
On the same day ETF Connect was launched, Chinese regulators announced a new program – due to come into effect in about six months – that will Allow investment in financial derivatives on the mainland via Hong Kong.
A later phase of the program is set to allow mainland investors to trade derivatives in Hong Kong.
Those moves to link the Hong Kong and mainland markets follow similar stock and bond programs that began in 2014. Mainland China is home to the world’s second-largest stock market by value.
Other financial firms are coming to the ETF market – focusing on larger China clients who want to invest internationally through Hong Kong.
The 40-share “FactSet Hywin Global Health Care Index” tracks stocks of companies listed mostly in Europe or North America – such as AstraZeneca and Merck.
The plan is to market this index through a Hong Kong-listed ETF.
‘Hywin’ customers [more than 130,000 across Asia]Increasingly, they find the world too fluid, and too volatile. Nick Xiao, Hywin Holdings vice president and CEO of Hywin International for the company’s offshore business, said they want to seize opportunities but are less confident these days about stock selection and timing.
After this first co-branded index, Xiao said he expects to further collaborate with FactSet to create indexes and ETFs. He noted that there are already eight ETFs listed in Hong Kong that track the FactSet Indexes.
Among institutional investors and money managers in Greater China, nearly 40% said they invested more than half of their assets under management in ETFs, much higher than the 19% stake in the United States, Brown Brothers Harriman found in an annual poll released in january.
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