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China’s latest Connect scheme expands ETF growth potential says Cerulli Associates

Cerulli Associate’s Singapore office reports that the launch of the long-awaited ETF Connect scheme between mainland China and Hong Kong this year further adds to the variety of cross-border schemes available to investors in the two markets and is expected to boost the trading volume of mainland ETFs. 

A total of 87 eligible products have been listed on the Connect, including four Hong Kong stock ETFs and 83 A-share ETFs. As of June 2022, total assets of the 83 ETFs exceeded RMB670 billion (USD100 billion), according to the China Fund Report, accounting for more than 70 per cent of the mainland ETF market. Industry observers estimate that about RMB150 billion to RMB200 billion in northbound funds will eventually be allocated to mainland ETFs through the ETF Connect.

There are hopes that the scheme will play a major role in expanding the ETF markets in both places, improving liquidity, and growing the investor base, Cerulli says.

“However, judging by the huge difference in number of available products offered by both markets, at least in the initial stage, it is likely that the mainland will stand to benefit more. Compared with the four Hong Kong stock ETFs which focus on the Hang Seng and technology sector indexes, the 83 A-share ETFs have a wider range of tracking targets, from wide-base indexes and narrow-base indexes to rich industry-themed indexes and are selected from 20 fund management companies. Hence, the coverage of mainland ETFs is much broader, especially with industry-themed products focusing on advanced manufacturing, new energy vehicles, and low-carbon fields. These sectors are promising but relatively scarce in the Hong Kong stock market and should encourage more foreign investors to increase their allocations to the A-share market.”

On the other hand, Hong Kong-listed funds have the advantage of having no limits on daily rises or declines, discounted premiums which are lower than mainland-listed ETFs in the same category, and lower management fees, Cerulli writes. Mainland investors can diversify their portfolios and have access to global asset classes via the scheme.

“Unlike earlier ETF cross-listing schemes, the ETF Connect provides a more direct and efficient route for investors in both markets, with lower transaction and management fees. Cerulli expects the scheme to improve the liquidity of ETFs in both places, improve the investor structure in the A-share market, bring in more long-term funds for China’s economic transformation, and enhance the international status of China’s capital market. Hong Kong could also strengthen its status as an offshore RMB financial management centre in the long run.” 

According to Pan Yanjun, analyst: “Considering the different investment behaviours and preferences in the mainland and Hong Kong, asset managers in both markets need to conduct more research to understand investors’ needs, carry out targeted marketing, and improve cross-border service capacities. It is worth noting that some fund management companies (FMCs) have set up overseas departments or Hong Kong subsidiaries to expand their businesses.”

She adds: “Investor education on the ETF Connect is also important. FMCs should focus on the differences between Hong Kong’s and mainland’s ETF operation mechanisms, underlying indexes, investment values and risk disclosures. Investors should be also informed about the features of ETFs before deciding on the products to invest in.”

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