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 link launched in 2014, followed by other systems linking the Hong Kong market more closely with that of the mainland.
Anthony Kwan | 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 gained popularity in the US after the financial crisis and built $3 trillion businesses like BlackRock’s iShares ETF brand.
In mainland China, ETFs have multiplied faster than the stock market. In five years, the number of ETFs has more than quadrupled to 645, while the number of stocks has only grown by 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 become a 1.4 trillion yuan ($209 billion) business, more than tripling in just five years.
A regulatory change that took effect Monday opened up that ETF market to foreign investors through Hong Kong — a program called ETF Connect.
Beijing-based ChinaAMC, which said it launched the mainland’s first ETF in 2004, has ridden the industry boom and manages 10 of the funds eligible for trading under the new cross-border trading program. These include ETF tracking indices and topics such as semiconductor developments.
ETF Connect leans heavily towards the continent. Of the initial batch of eligible ETFs, 83 were listed on the mainland, compared to just four in Hong Kong.
Goldman Sachs predicts $80 billion more in mainland asset purchases than those in Hong Kong over the next 10 years.
“Adding Northbound ETFs to one’s A-share portfolio can potentially widen the effective frontier and improve the risk/reward ratio,” Goldman Sachs analysts wrote in a report this week. “Although the initial eligible universe for the South appears narrow, the underlying components still offer mainland investors broad exposure to internet and HK-listed financial stocks.”
Chinese internet tech 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 to increase international investors’ understanding of ETFs in mainland China and increase the impact of the products, Xu Meng, fund manager of ChinaAMC, said in a statement. Xu is also the executive general manager of the firm’s quantitative investment division.
ChinaAMC said it had more than 300 billion yuan in passively managed assets as of the end of 2021.
New links to mainland China
On the same day that ETF Connect launched, Chinese regulators announced a new program — due to take effect in about six months — that will allow investments in financial derivatives on the mainland through Hong Kong.
The next phase of the program is set to allow mainland investors to trade financial derivatives in Hong Kong.
These moves to connect 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.
More ETFs to come
Other financial firms are coming into the ETF market – with a focus on larger Chinese clients who want to invest internationally through 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 40-stock FactSet Hywin Global Health Care Index tracks stocks of companies listed primarily in Europe or North America, such as AstraZeneca and Merck.
The plan is to commercialize this index with an ETF registered in Hong Kong.
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“Hywin customers [more than 130,000 across Asia], more and more they find the world very fickle, very fickle. They want to capture opportunities, but nowadays they are not so sure about stock selection and timing,” said Nick Xiao, vice president of Hywin Holdings and CEO of the firm’s overseas business, Hywin International.
After this first co-branded index, Xiao said he expects more cooperation with FactSet to create indexes and ETFs. He noted that there are now eight ETFs listed in Hong Kong that track the FactSet indexes.
Among institutional investors and money managers in Greater China, nearly 40 percent said they invested more than half of their assets under management in ETFs, far higher than the 19 percent share in the U.S., Brown Brothers Harriman found in an annual survey released in January.
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