Published by Asia Asset Management – 18th Dec 2018
Hong Kong’s smaller exchange-traded fund (ETF) providers are reluctant to launch products in China if the city’s securities regulator uses cross-listings as an alternative to the long-awaited ETF connect programme because it’s more expensive for small issuers.
The ETF connect is seen as an extension of existing cross-border schemes such as stock and bond connects, which allow investors in Hong Kong and China to trade in each other’s markets. It was unveiled in 2016 by Charles Li, chief executive officer of the Hong Kong Stock Exchange (HKEX), but has yet to come to fruition.
Christina Choi, a senior executive at Hong Kong’s Securities and Futures Commission, said last month that regulators in China and Hong Kong haven’t finalised a timeframe for the launch because there are difficult technical issues to resolve, such differences in settlement mechanisms.
She said regulators are studying various alternatives, including cross-listing under the mutual recognition of funds (MRF) scheme, which allows Hong Kong and Chinese asset managers to distribute funds in each other’s jurisdictions. The initial combined two-way quota under the MRF is 600 billion RMB (US$87.12 billion). But the costs incurred in listing funds in both Hong Kong and China may shut out small ETFs.
“We will not consider launching our ETFs in China if the ETF connect programme is launched in the form of MRF,” a fund manager at a Hong Kong-based ETF provider tells Asia Asset Management (AAM).
“Small players with a few ETF offerings like us will not find the cross- listing initiative very attractive. It is not financially efficient to relist our products in China with the high listing and distribution cost,” he says, speaking on condition of anonymity.
But he doesn’t expect it to deter big players or those with a comprehensive mix of ETF products as he says Chinese retail investors are very keen on funds that track Hong Kong stocks.
Another Hong Kong-based ETF manager agrees that small Hong Kong ETF issuers may be unable to afford the regulatory and retail distribution costs of cross-listings.
Some of these issuers do not have a physical presence in China, which may be required for fund distribution in cross-listings, so this will be a major drawback for them, this manager tells AAM, speaking on condition of anonymity.
According to John Sin, head of asset servicing for Greater China at US lender BNY Mellon, the long delay in launching the ETF connect and possible changes to a cross-listing mechanism are creating challenges for ETF issuers because they need to work out business plans, including product development and distribution strategies.
“Nonetheless, judging by the experience with other connect programmes one would expect that ETF connect will attract new issuers and more variety of products entering into the Hong Kong market, but AUM (assets under management) and product breadth will take time to build,” Mr. Sin tells AAM.
There were 124 ETFs and leverage and inverse products listed on HKEX with total market capitalisation of approximately HK$300 billion (US$38.4 billion) at the end of October, according to data from the exchange.
