Ivy Yam, Simmons & Simmons discusses CSRC’s announcement to include ETFs in China’s connect scheme with Hong Kong on ETF TV

Presented by Syntax Advisors.

Margareta Hricova: Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investment. I’m Margareta Hricova and joining me today is Ivy Yam, partner at Simmons & Simmons in Hong Kong, and Deborah Fuhr. Welcome Ivy and Debbie.

Ivy Yam: Thank you, Margareta. It’s great to be here.

Deborah Fuhr: Thank you.

So, Ivy, last week the CSRC announced a proposal to include ETFs in Stock Connect, and many are calling this a 25th anniversary gift for the handover. Why is that the case?

Ivy Yam: Well, you can call it that. It’s not an official thing, but I guess there have been in the past a few instances where the mainland Chinese government has announced big initiatives related to Hong Kong.

Around June or July, very close to the anniversary of the handover, that actually goes back all the way from SARS in 2003 when they announced the opening of tourism from China to Hong Kong. And then in more recent history we had the Northbound Bond Connect, which was announced in 2017. And also the Greater Bay Area Wealth Management Connect announced in 2020.

In terms of ETF Connect itself, ever since the beginning of Stock Connect in 2014, the question has always been asked, will this extend to ETF? And the response was always positive. It will eventually cover ETFs, and it seems like now it’s really the time when the regulators decide, we’re ready.

Margareta Hricova: How does the Connect program work and how active is the trading in Stock Connect?

Ivy Yam: Before Stock Connect was introduced in 2014, for Hong Kong and international investors, there were only very limited channels where they could invest in China. Mainland China listed stocks, A-shares, so either by derivatives, P-notes or specific programs like the QFII or RQFII, something that opens a gateway for the respective market, so Hong Kong and also mainland China to invest in and trade in stocks of the other markets. Fx Hong Kong and overseas investors are able to trade locally in Hong Kong, but they can access stocks listed on the Shanghai Stock Exchange and later on, on the Shenzhen Stock Exchange.

This was done by the Hong Kong and Shanghai and the Shenzhen stock exchanges and the regulators working out the connectivity channel amongst them so that investors can trade in the respective markets and have access to the other markets’ securities.

So as of today, 80% of Northbound for both Shenzhen and Shanghai, has been used up. And in terms of turnover, so buy and sell, today, the numbers are around 128 billion renminbi, Northbound, from Hong Kong to mainland China, and 33 billion Hong Kong dollars, Southbound. So from mainland China back to Hong Kong.

Since the beginning of Stock Connect, the number has actually been growing up markedly. So we are seeing a growing trend of the use of Stock connect.

Deborah Fuhr: What are the criteria that CSRC expects ETFs to meet to be included in the program?

Ivy Yam: So for ETFs listed on the Hong Kong Stock Exchange, they have to have a daily average AUM for at least six months of 1.7 billion HKD, because it has to be passively managed. The index must have been launched for at least a year. So the ETFs listed in Hong Kong, the major investments have to be Hong Kong stocks. If we track the Hang Seng index, a certain percentage of the stocks have to be within the stocks eligible for Southbound trading, for Stock Connect fx.

There are also diversification requirements. You can’t be too concentrated during this year, so similar requirements also apply to Northbound. So again, you have to have its own trading record.

For the Northbound ETFs, so Shanghai or Shenzhen-listed ETFs, the main investments have to be A-shares. And there are again certain diversification requirements.

Margareta Hricova: And can you provide examples of the ETFs that are likely to be included?

Ivy Yam: Actually, they’re only a handful, probably less than ten ETFs in Hong Kong currently that would be eligible for the scheme. ETFs such as the very famous Tracker Fund (Ticker: TraHK) and also there are a couple managed by Hang Seng, one or two managed to buy iShares, one or two by CSOP, a Chinese background manager.

Hopefully this is the first stage because while mainland Chinese investors do like to invest in Hong Kong stocks, they’re also interested in a much wider universe of investments fx like US stocks or fixed income ETFs. So hopefully there will be more to come.

Deborah Fuhr: When are we likely to see ETF Connect start?

Ivy Yam: The regulators officially say it will take at least two months, so we will watch this space.

Deborah Fuhr: That’s great. Thank you for joining us.

Ivy Yam: Thank you. Thank you for having me.

Margareta Hricova: Thank you, Ivy.

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Published on June 7, 2022