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ETFs come to China with a vengeance


Hong Kong, a British colony from the 1840s to 1997, grew into a global finance center just off the coast of mainland China. A stock connect launched in 2014, followed by other systems linking Hong Kong’s market closer with the mainland’s.

Anthony Kwan | Bloomberg | Getty Images

BEIJING — China has joined the worldwide craze over exchange-traded funds, the investment product that lets traders buy and sell a basket of stocks.

Higher often called ETFs, the funds surged in popularity within the U.S. 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 variety of ETFs greater than quadrupled to 645, while the variety of stocks rose by a mere 53% to 4,615.

That is in keeping with official data and a report from Hong Kong Exchanges and Clearing, which also stated the mainland ETF market has develop into a 1.4 trillion yuan ($209 billion) business, greater than tripling in only five years.

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

Beijing-based ChinaAMC, which said it launched the primary ETF on the mainland in 2004, rode the industry’s surge and operates 10 of the funds eligible for trading under the brand new cross-border trading program. Those include ETFs tracking indexes and themes like semiconductor development.

The ETF Connect leans heavily toward the mainland. Of the initial batch of eligible ETFs, 83 are listed on the mainland, versus just 4 in Hong Kong.

Goldman Sachs predicts $80 billion more in purchases of mainland assets versus those in Hong Kong over the following 10 years.

“Adding Northbound ETFs to 1’s A-share portfolio could potentially expand the efficient frontier and improve the chance/reward,” Goldman Sachs analysts wrote in a report this week. “While the initial Southbound eligible universe looks narrow, the underlying constituents still offer mainland investors broad exposure to HK-listed Web and Financial stocks.”

Chinese web tech giants like Tencent and Alibaba have listings in Hong Kong but not the mainland. Alternatively, many China-focused corporations are only listed on the mainland.

One in all the things the ETF Connect can do is boost international investors’ understanding of mainland China ETFs and increase the products’ influence, Xu Meng, a ChinaAMC fund manager, said in an announcement. Xu can also be executive general manager of the firm’s quantitative investment department.

ChinaAMC claims that as of the top of 2021, it had greater than 300 billion yuan in passively managed assets.

Latest links to mainland China

The identical day the ETF Connect launched, Chinese regulators announced a latest program — set to take effect in about six months — that will allow investment in financial derivatives on the mainland via Hong Kong.

A subsequent phase of this system is ready to permit mainland investors to trade financial derivatives in Hong Kong.

Those moves to attach 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 by value.

More ETFs to return

Other financial firms are coming to the ETF market — with a deal with greater China clients wanting to take a position internationally through Hong Kong.

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

The 40-stock “FactSet Hywin Global Health Care Index” tracks shares of corporations mostly listed in Europe or North America — akin to AstraZeneca and Merck.

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

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“Hywin’s clients [more than 130,000 across Asia], increasingly, they find the world very fluid, very volatile. They need to capture opportunities but they’re less sure as of late about picking the stock and picking the timing,” said Nick Xiao, Hywin Holdings’ vp and CEO of the firm’s overseas business, Hywin International.

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

Amongst institutional investors and money managers in Greater China, nearly 40% said they invested greater than half of their assets under management in ETFs, far higher than the 19% share within the U.S., Brown Brothers Harriman present in an annual survey released in January.

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