ETFs come to China in revenge

Hong Kong, a British colony from the 1840s to 1997, grew into an international financial center just off the coast of mainland China. A share connection was launched in 2014, followed by other systems that link Hong Kong’s market closer to the mainland.

Anthony Kwan | Bloomberg | Getty pictures

BEIJING ̵[ads1]1; China has joined the global craze for exchange-traded funds, the investment product that allows traders to buy and sell a basket of stocks.

Better known as ETFs, the funds grew in popularity in the United States after the financial crisis, building $ 3 trillion in companies such 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 by only 53% to 4,615.

This is according to official data and a report from Hong Kong Exchanges and Clearing, which also said that the mainland ETF market has become a business of 1.4 trillion yuan ($ 209 billion), more than tripling in just five years.

A regulatory change that took effect on Monday opened up this ETF market for foreign investors via Hong Kong – a program called ETF Connect.

Beijing-based ChinaAMC, which said it launched the first mainland ETF in 2004, drove the industry’s progress and operates 10 of the funds eligible for trading under the new cross-border trading program. These include ETFs tracking indices and topics such as semiconductor development.

ETF Connect leans heavily towards the mainland. Of the first group of eligible ETFs, 83 are listed on the mainland, compared to only four in Hong Kong.

Goldman Sachs predicts $ 80 billion more in the purchase of assets on the mainland compared to those in Hong Kong over the next 10 years.

“Adding northbound ETFs to one’s equity portfolio could potentially expand the effective limit and improve risk / reward,” Goldman Sachs analysts wrote in a report this week. “Although the original southbound qualified universe looks narrow, the underlying components still offer mainland investors broad exposure to HK-listed Internet and financial stocks.”

Chinese Internet technology giants such as Tencent and Alibaba have listings in Hong Kong, but not on the mainland. On the other hand, many China-focused companies are listed only on the mainland.

One of the things ETF Connect can do is increase international investors’ understanding of mainland China ETFs and increase the impact of their products, said Xu Meng, a ChinaAMC fund manager, in a statement. Xu is also the general manager of the company’s quantitative investment department.

ChinaAMC claims that at the end of 2021 it had more than 300 billion yuan in passively managed assets.

New links to mainland China

On the same day that ETF Connect was launched, Chinese regulators announced a new program – set to take effect in about six months – that would allow investment in mainland financial derivatives via Hong Kong.

A subsequent phase of the program is set to allow mainland investors to trade financial derivatives in Hong Kong.

These measures to link Hong Kong and the mainland markets follow similar stock and bond programs that began in 2014. Mainland China is home to the world’s second largest stock market in terms of value.

More ETFs are coming

Other finance companies are entering the ETF market – focusing on clients in greater China who want to invest internationally through Hong Kong.

Property manager Hywin Holdings, based in Shanghai with a subsidiary in Hong Kong, last week launched a stock index for the healthcare sector with FactSet, a financial data and software company.

The 40-share “FactSet Hywin Global Health Care Index” tracks stocks in companies that are mostly listed in Europe or North America – such as AstraZeneca and Merck.

The plan is to commercialize that index with an ETF listed in Hong Kong.

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“Hywin’s customers [more than 130,000 across Asia], they increasingly find that the world is very fluid, very volatile. They want to seize opportunities, but these days they are less confident in choosing stocks and choosing timing, “said Nick Xiao, Hywin Holdings’ vice president and chief executive officer of the firm’s foreign operations, Hywin International.

Following this initial co-branded index, Xiao said it expects more collaboration with FactSet to create indices and ETFs. He noted that there are already eight ETFs listed in Hong Kong tracking FactSet indices.

Among institutional investors and money managers in Greater China, nearly 40% said they invested more than half of their assets under management in ETFs, far higher than the 19% share in the US, Brown Brothers Harriman found in an annual survey released in January .

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