29 October 2020
On 28 August 2020, regulators in Hong Kong and Mainland China authorized the first batch of exchange traded funds (ETFs) under a scheme which facilitates cross-listing of ETFs between the two markets (Scheme). The Scheme will allow Hong Kong investors to gain access to ETFs listed in Mainland China, and Mainland investors to gain access to ETFs listed in Hong Kong.
The Securities and Futures Commission (SFC) approved the authorization of the CSOP Yinhua CSI 5G Communications Theme ETF and one other ETF (the Hong Kong ETFs), which were listed on The Stock Exchange of Hong Kong (HKEX) on 23 October 2020. The China Securities Regulatory Commission (CSRC) approved two ETFs (the Mainland ETFs) which were listed on the Shenzhen Stock Exchange (SZSE) on the same day. Following the listings, the HKEX and the SZSE signed a memorandum of understanding to promote the Scheme and celebrate the financial connections between the two markets.
ETF master-feeder structure
Under the Scheme, each new ETF is structured as a feeder fund run by a local asset manager that invests at least 90% of its assets in a target ETF (master ETF) listed in the other market.
The Hong Kong ETFs will invest in their SZSE listed master ETFs through the Renminbi Qualified Foreign Institutional Investor programme which allows foreign investors to invest directly in Mainland China’s bond and equity markets. Meanwhile, the Mainland ETFs will invest in their HKEX listed master ETFs through the Qualified Domestic Institutional Investor programme which allows Mainland Chinese investors to access foreign markets.
On the Hong Kong side, measures to ease regulations for overseas issuers to enter the Hong Kong ETF market through a master-feeder structure were put in place at the end of last year. In December 2019, the SFC announced that it would permit an SFC-authorized feeder ETF to invest its assets in an overseas-listed master ETF without the master ETF requiring to go through the SFC authorization process, if certain conditions and investor protections are met (see our previous article here). Prior to this, master-feeder structures were only permitted if both the feeder ETF and the master ETF were authorized by the SFC.
Cross-listing as an alternate to ETF Connect
The Scheme is a much anticipated development following continued efforts between the regulators and the HKEX and SZSE to link the ETF markets between Hong Kong and Mainland China through ‘ETF Connect’ (see our previous article here). Under this mechanism, it is proposed that ETFs would be added to the list of eligible securities tradable under the Stock Connect scheme. However ETF Connect was stalled in 2018 due to technical differences in operational and settlement mechanisms between the Hong Kong and Mainland markets. While the SFC and CSRC resumed discussions in January 2020, the launch date of ETF Connect remains unknown.
The Scheme is an alternative mechanism to enable Hong Kong and Chinese fund managers to distribute their fund products in each other’s jurisdictions. By using a master-feeder ETF structure, the Scheme avoids the settlement and operational issues that would otherwise arise under a dual-listing arrangement.
The introduction of the Scheme will boost the ETF market in Hong Kong, providing investors with a broader spectrum of product choices through access to the Mainland market. Notably, it will provide an opportunity for international investors to gain access to Mainland onshore ETFs.
The Scheme is the latest measure to facilitate cross-boundary investment between Hong Kong and Mainland Chinese investors. It follows the successful launch of Stock Connect in 2014 and Bond Connect in 2017, and aligns with the broader developments in the Greater Bay Area (see our article here).
Deacons is delighted to have assisted with the successful Hong Kong listing of one of the first ETFs under the Scheme.
For further information, please contact:
Rakhi Punjabi, Deacons
rakhi.punjabi@deacons.com.hk
