ETFs arrive in China in force


Hong Kong, a British colony from the 1840s to 1997, has become an international financial center just off the coast of mainland China. A stock connect launched in 2014, followed by other systems linking the Hong Kong market more closely to the mainland.

Anthony Kuan | Bloomberg | Getty Images

BEIJING — 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 rose to popularity in the United States after the financial crisis and created $3 trillion businesses like BlackRock’s iShares ETF brand.

In mainland China, ETFs have grown faster than the stock market. In five years, the number of ETFs has more than quadrupled to 645, while the number of stocks has increased by only 53% to 4,615.

That’s according to official data and a report from Hong Kong Exchanges and Clearing, which also said the mainland’s ETF market has grown into a 1.4 trillion yuan ($209 billion) business, which has more than tripled in just five years.

A regulatory change that took effect on Monday opened up that ETF market to overseas investors through Hong Kong — a program called ETF Connect.

Beijing-based ChinaAMC, which said it launched the first ETF on the mainland in 2004, has benefited from the rise of the industry and operates 10 of the funds eligible for trading under the new cross-border trading program. These include ETF tracking indices and themes such as semiconductor development.

The Connect ETF leans heavily towards the continent. Of the initial batch of eligible ETFs, 83 are listed on the mainland, compared to just four in Hong Kong.

Goldman Sachs plans an additional $80 billion in mainland asset purchases over those in Hong Kong over the next 10 years.

“Adding ETF Northbound to its A-share portfolio could potentially broaden the efficient frontier and improve the risk-reward ratio,” Goldman Sachs analysts wrote in a report this week. “Although Southbound’s initial eligible universe appears narrow, the underlying constituents still offer mainland investors broad exposure to HK-listed internet and financial stocks.”

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

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

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

New routes to mainland China

On the same day as ETF Connect was launched, Chinese regulators announced a new program – expected to come into effect in about six months – that would allow financial derivatives investing on the mainland via Hong Kong.

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

These moves to connect Hong Kong and mainland markets follow similar programs for stocks and bonds that began in 2014. Mainland China is home to the world’s second-largest stock market.

More ETFs to come

Other financial firms are entering the ETF market, focusing on clients in Greater China who want to invest internationally via Hong Kong.

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

The “FactSet Hywin Global Health Care Index”, made up of 40 stocks, tracks stocks of companies mostly listed in Europe or North America, such as AstraZeneca and Merck.

The plan is to market this index with an ETF listed in Hong Kong.

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“Hywin’s customers [more than 130,000 across Asia], more and more, they find the world very fluid, very volatile. They want to seize the opportunities, but they are less sure these days about picking the stocks and picking the timing,” said Nick Xiao, Hywin Holdings vice president and CEO for the company’s overseas business, Hywin International.

After this first co-branded index, Xiao said he expects more collaboration with FactSet to create indices and ETFs. He noted that there are already eight Hong Kong-listed ETFs that track FactSet indices.

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


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