The new ETF Connect with Japan is a further opening-up of China’s capital market, but institutional investors may not benefit as much as their retail counterparts from it.
The scheme, which was launched on June 25, came just a week after the start of the Shanghai-London Connect.
The eastbound leg of the China-Japan exchange-traded-fund (ETF) Connect allows Chinese fund managers to set up Shanghai-traded ETFs that invest at least 90% of assets, through the qualified domestic institutional investors (QDII) regime, in Japan ETFs.
Likewise, in the westbound direction, Japanese ETF managers can invest in Chinese ETFs through the qualified foreign institutional investor (QFII) and its renminbi-equivalent RQFII schemes.
Four eastbound ETFs and four westbound ETFs were listed on the exchanges in Shanghai and Tokyo on Tuesday.
"Both Chinese and Japanese investors can benefit from a more direct, cost-efficient way of getting exposure. It also reaffirms Chinese policy makers’ commitment towards building a more open financial market, despite recent turbulence," Zhang Howhow, a partner of KPMG China’s global strategy group , told AsianInvestor.
The China-Japan ETF Connect aims to boost cooperation and connectivity between China and Japan’s capital markets, which are the second and the third largest in the world, Becky Liu, head of China macro strategy, Standard Chartered, said in a note on June 26.
The official launch of the cross-border products took place less than 10 months after the initial feasibility study. This scheme can easily be replicated between China and other major financial centres, and so could be used as a new model to open up China’s capital market, Liu said.
The Shanghai-London Stock Connect was launched on June 17. The new structure allows trading using global depositary receipts (GDRs) for Chinese companies listing in London, and Chinese depositary receipts (CDRs) for London firms listing in the onshore Chinese market.
Beijing is also working on the merger of the QFII and RQFII regimes in a bid to attract more foreign capital and further open up its capital market.
However, institutional investors' interest in the programme may be only lukewarm compared with the previous connect schemes.
"The Shanghai-Tokyo ETF Connect is not a true scheme, as it operates on a feeder fund basis, where 90% or so of the base fund can buy into the selected fund in the other market," Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, told AsianInvestor.
It creates the potential for underperformance which will not sit well with institutional investors who may choose to go where they can get 100% replication, he said.
Institutional investors have been more receptive towards investing in China and while the new avenue will be helpful too, such mutual fund-like products are typically marketed at retail consumers in China, Zhang at KPMG said.
The programme is indeed more relevant for the retail market. Unlike the previous connect schemes, Chinese retail investors are eligible to purchase these ETFs.
The stock connect programme between Shanghai or Shenzhen and Hong Kong requires minimum financial assets of Rmb500,000 ($72,700), while the Shanghai-London Connect requires at least Rmb3 million to participate.