The current HKEX ETF strategy has three principal components. HKEX aims to encourage product diversity through expanding ETF and L&I listings; improve market access, delivery and liquidity; and focus on regional and international education about the tax efficiency and other benefits of Hong Kong-listed ETFs.
Hong Kong should grow its share of global ETF listings and trading and firmly establish itself as the Asia hub. It has a supportive ecosystem made up of sophisticated investors, ancillary financial services and, of course, access to Mainland China.
China Connect expands
The Connect programmes are continuing to evolve in order to attract investors. Although the Connect scheme is a closed loop for purchases and sales of securities, repatriation of northbound capital is much easier than from investments made through the Qualified Foreign Institutional Investor and other schemes, because there is no lock-in period, said Christopher Hui, Head of Project Management at HKEX.
Moreover, since Shenzhen Stock Connect there are no longer aggregate quotas, and planned enhancements include the introduction of real-time delivery versus payment (RDVP) settlement, which will help address concerns about potential counterparty risk.
In the future, Mainland insurance companies are likely to be substantial southbound investors in order to diversify portfolios, find liquidity and enhance yields, noted Vernon Willis at Haitong Securities in a panel discussion chaired by Jessica Morrison, director, equity trading at Deutsche Bank.
Blackrock’s Cunningham pointed out that trade execution reliability in A-shares is essential, perhaps especially for index houses. He and his fellow speakers agreed that the inclusion of A-Shares with the MSCI’s global emerging market index would be major boost for the schemes – and which subsequently occurred in June.
Chris Lee, Senior Vice President, Client and Marketing Services, Market Development at HKEX pointed out that there have been several changes to Connect since the scheme was first launched and noted RDVP settlement will be available by the end of the year. Already, HKEX has improved the comfort factor for beneficial ownership and there has been considerable success working with the regulators of Irish and Luxembourg funds.
Nick Ronalds, managing director, equities at ASIFMA agreed that RDVP is a very significant development, especially for UCITs as European regulators had expressed graves concerns about counterparty risk. But, there are other problems, such as holiday trading and meeting T+0 deadlines for CNH settlement.
According to Andy Maynard, head of Asia Pacific execution services at HSBC, the CNH’s lack of liquidity is a big concern and a limiting factor, causing trading ebbs and flows. Pre-funding has become difficult and the renminbi was very volatile during the past year.
Global long-only emerging market funds dominate northbound flows, but even they don’t consider Mainland China a great investment prospect at present. It’s not so much the restrictions within the Connect programme or even the index status of A-shares that account for muted volumes, but rather that the strategic investment case is not compelling.
Nevertheless, the Connect schemes are expanding Hong Kong’s role as a gateway to Mainland China, and HKEX is keen to strengthen its position as a leading global financial centre.
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