Chinese insurance firms are likely to diversify away from renminbi exposure using the proposed link for exchange-traded funds between China and Hong Kong, said Tobias Bland, chief executive of Hong Kong-based asset manager Enhanced Investment Products.

Speaking at the CLSA Investors’ Forum yesterday in Hong Kong, he also expressed concern that the city would lose some mainland flows to London, as Beijing is discussing a similar ETF Connect scheme with the UK.

“Issuers in Hong Kong are scratching our heads very aggressively at this moment to get the right products in place for the [mainland] insurance base,” said Bland. He added that non-China-focused dollar-denominated ETFs would be particularly appealing to mainland insurers (assuming they are permitted to buy them).

“Now I definitely feel people [Chinese investors] are moving into non-RMB assets, whether they want yields in dollar bonds or Australian bonds,” he said, adding that they were looking to diversify their currency risk. 

Moreover, Chinese retail and wealthy investors are now looking to non-China-focused equities listed in Hong Kong for portfolio diversification, noted Bland. For instance, HSBC, which offers a dividend yield of 6.75%, has attracted the most flows of any Hong Kong-listed stock via the southbound (Shanghai-to-Hong Kong) Connect. 

The acceleration in southbound flows via the Shanghai-Hong Kong Stock Connect this year would appear to support Bland's view.

Relaxing the Connect rules

It was announced in mid-August that Hong Kong ETFs could be traded through both the Shanghai and Shenzhen links from next year, while Chinese insurers received the green light to buy Hong Kong stocks via both Connect schemes on September 7.

Mainland insurers may need further clarification from their domestic regulator about whether they will be able to buy Hong Kong-listed ETFs under the link, once it goes live.

Meanwhile, ETF providers are awaiting further details from the Chinese authorities. One of their concerns is that Hong Kong products will take a long time to be approved, as was the case under the mutual recognition of funds (MRF) scheme, as reported.

In the case of ETF Connect, they hope that if the Hong Kong regulator approves an ETF, that fund will not also need to the go-ahead from the China Securities Regulatory Commission (CSRC).

It seems that this may well be the case. There is likely to be a single-approval process, meaning Hong Kong-approved ETFs will not need to seek further approval from the CSRC, noted a source who has spoken with the mainland regulator. However, he added, only Hong Kong-domiciled vehicles will be included under the ETF link, as is the case under the MRF rules.