Expansion of Mainland-HK Stock Connect with More ETFs Deemed Critical to Financial World
In the past 20 years, exchange traded funds (ETFs) have been gaining prominence in China, despite being a relatively recent investment tool even in well-established capital markets. These pooled investment securities, which can be bought and sold like individual stocks and may be designed to track a range of assets from indices to commodity prices, are becoming increasingly important.
TroibNews 
Editor's note: Wang Jianhui is the general manager of the research and development department at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN.
As a relatively new investment tool, even in mature capital markets, exchange traded funds (ETFs)—a pooled investment security that can be bought and sold like an individual stock and can be structured to track anything from various indices to commodity prices—have gained significance in China over the last 20 years.
On July 22, 2022, 141 Chinese mainland-listed ETFs and 10 Hong Kong-listed ETFs were included in the mainland-Hong Kong stock connect.
Based on the 2024 revised implementation rules of the Shanghai/Shenzhen-Hong Kong stock connect, the three stock exchanges have recently updated their lists of tradable ETFs.
Several important implications are worthy of attention.
This recent move as another major upgrade of the "stock connect" could enhance market participation and efficiency.
Due to their low costs and non-systematic risk-minimizing nature, ETFs serve risk-averse and cost-sensitive long-term investors as well as short-term traders more effectively.
By utilizing suitable ETFs, Chinese mainland investors can access the market on the other side more easily and efficiently without needing to deal with the 2,760 A-shares or 545 Hong Kong stocks individually.
The recent ramp-up of the mainland side (northbound) not only brings in more industry-concept plays such as cloud computing, software, robotics, central state-owned enterprises' shareholder returns, rare metals ETFs, and more, but also introduces enhanced ETFs with some active management for the first time.
With more available ETFs, Hong Kong and foreign fund investors have a greater chance to outperform the overall market. By the end of this week, there were 974 ETFs with a total capitalization of 2.65 trillion yuan ($364.31 billion) in the A-share market.
In the last two years, 70 passively managed index funds outperformed with returns ranging from 17.3 to 50.4 percent, while only nine actively managed open-end funds could reach that level.
The timing of increasing ETF trades now is more advantageous.
The average price-to-earnings ratio in the segment is 20.08 compared with 28.1 two years ago, according to iFind data.
If used properly and reasonably, ETFs can be profitable tools of arbitrage when the funds or the underlying stocks are not correctly priced. Investors could choose to buy the related ETF or redeem the fund for underlying shares to take advantage.
More importantly, the expansion of ETF supply signals that China will stick to its opening-up policy. It will roll out more necessary measures to facilitate cross-border investments and trades, gradually integrating into the global financial markets, as promised upon joining the World Trade Organization 24 years ago.
Hong Kong has played and will continue to play a key role as both the bridge to other markets and an indispensable component of the greater China market. Although the current "stock connect" only covers about half of the A-share market, the total capitalization already accounts for 91 percent of the mainland market. With the upgraded "connect" program through ETFs, Hong Kong and foreign investors could establish or deepen their presence in the mainland market to share the ongoing growth of the Chinese economy.
Additionally, the mainland market is likely to receive a boost.
On one end, the expectation of improved liquidity in the A-share market could help strengthen the confidence of Chinese mainland investors.
By the end of last week, the average daily turnover of the 782 stock ETFs was 29.6 billion yuan, higher than 16.5 billion when ETFs were included in the program, but lower than the level in January at 36.4 billion yuan.
The turnover rate was 5.38 percent, down from 6.89 percent two years ago and 7.15 percent at the beginning of this year, according to iFind data, indicating that trades have become less active.
Making 60 percent more ETFs tradable for Hong Kong and foreign investors could generate more trades in the future.
With six more Hong Kong or "south-bound" ETFs added to the "menu," the mainland demand for cross-border investment could be better satisfied.
Since the beginning of 2024, the average turnover of outbound or cross-border ETFs accounted for 28.4 percent of total ETF trades, indicating growing attention from Chinese mainland investors.
Mathilde Moreau contributed to this report for TROIB News
As a relatively new investment tool, even in mature capital markets, exchange traded funds (ETFs)—a pooled investment security that can be bought and sold like an individual stock and can be structured to track anything from various indices to commodity prices—have gained significance in China over the last 20 years.
On July 22, 2022, 141 Chinese mainland-listed ETFs and 10 Hong Kong-listed ETFs were included in the mainland-Hong Kong stock connect.
Based on the 2024 revised implementation rules of the Shanghai/Shenzhen-Hong Kong stock connect, the three stock exchanges have recently updated their lists of tradable ETFs.
Several important implications are worthy of attention.
This recent move as another major upgrade of the "stock connect" could enhance market participation and efficiency.
Due to their low costs and non-systematic risk-minimizing nature, ETFs serve risk-averse and cost-sensitive long-term investors as well as short-term traders more effectively.
By utilizing suitable ETFs, Chinese mainland investors can access the market on the other side more easily and efficiently without needing to deal with the 2,760 A-shares or 545 Hong Kong stocks individually.
The recent ramp-up of the mainland side (northbound) not only brings in more industry-concept plays such as cloud computing, software, robotics, central state-owned enterprises' shareholder returns, rare metals ETFs, and more, but also introduces enhanced ETFs with some active management for the first time.
With more available ETFs, Hong Kong and foreign fund investors have a greater chance to outperform the overall market. By the end of this week, there were 974 ETFs with a total capitalization of 2.65 trillion yuan ($364.31 billion) in the A-share market.
In the last two years, 70 passively managed index funds outperformed with returns ranging from 17.3 to 50.4 percent, while only nine actively managed open-end funds could reach that level.
The timing of increasing ETF trades now is more advantageous.
The average price-to-earnings ratio in the segment is 20.08 compared with 28.1 two years ago, according to iFind data.
If used properly and reasonably, ETFs can be profitable tools of arbitrage when the funds or the underlying stocks are not correctly priced. Investors could choose to buy the related ETF or redeem the fund for underlying shares to take advantage.
More importantly, the expansion of ETF supply signals that China will stick to its opening-up policy. It will roll out more necessary measures to facilitate cross-border investments and trades, gradually integrating into the global financial markets, as promised upon joining the World Trade Organization 24 years ago.
Hong Kong has played and will continue to play a key role as both the bridge to other markets and an indispensable component of the greater China market. Although the current "stock connect" only covers about half of the A-share market, the total capitalization already accounts for 91 percent of the mainland market. With the upgraded "connect" program through ETFs, Hong Kong and foreign investors could establish or deepen their presence in the mainland market to share the ongoing growth of the Chinese economy.
Additionally, the mainland market is likely to receive a boost.
On one end, the expectation of improved liquidity in the A-share market could help strengthen the confidence of Chinese mainland investors.
By the end of last week, the average daily turnover of the 782 stock ETFs was 29.6 billion yuan, higher than 16.5 billion when ETFs were included in the program, but lower than the level in January at 36.4 billion yuan.
The turnover rate was 5.38 percent, down from 6.89 percent two years ago and 7.15 percent at the beginning of this year, according to iFind data, indicating that trades have become less active.
Making 60 percent more ETFs tradable for Hong Kong and foreign investors could generate more trades in the future.
With six more Hong Kong or "south-bound" ETFs added to the "menu," the mainland demand for cross-border investment could be better satisfied.
Since the beginning of 2024, the average turnover of outbound or cross-border ETFs accounted for 28.4 percent of total ETF trades, indicating growing attention from Chinese mainland investors.
Mathilde Moreau contributed to this report for TROIB News
