China’s securities regulator has added uncertainty to the long-awaited birth of cross-border exchange-traded funds by posting and then quickly removing an ETF application by E-Fund.
On February 7, the China Securities Regulatory Commission (CSRC) published its regular weekly update of the application and approvals schedule for mutual funds on its website.
That list initially included E-Fund’s application for its Hang Seng China Enterprise Index (HSCEI) ETF and feeder fund, which was filed on February 1. It confirmed the custodians as Bank of Communications and HSBC.
However, E-Fund’s application was taken down from the website the same day, leaving a rather puzzled market to speculate as to why. CSRC has offered no official explanation.
A source at one fund management firm, who prefers to remain anonymous, suggests that because the first cross-border ETF will be seen as a landmark, perhaps China’s State Council wants to take control of the approval process.
“Because cross-border ETFs are seen as a special innovation and different to other mutual funds, perhaps it won’t be necessary [for CSRC] to publicise the application and approval schedule,” he adds.
In fact China has been looking at cross-border ETFs since 2008. Research suggests China Asset Management Company was the first to submit an application for a Hang Seng Index ETF as long ago as April 2009, although even now its approval schedule has yet to be announced.
Given that timeframe, it’s hard to predict when either product will be cleared, and which will be first. The length of the process can in part be attributed to settlement complexity, China’s capital controls, the different product frameworks, investment management systems and risk mechanisms in domestic and overseas markets.
What we know is that the planned ETF products from China AMC and E-Fund are intended to be listed on the Shanghai and Shenzhen exchanges, respectively, to provide domestic investors access to the Hong Kong stock market’s main index.
The two bourses, fund management companies, securities firms and the China Securities Depositary and Clearing Corporation began ETF testing last December.
And the fund management source understands that technical issues surrounding the launch of cross-border ETFs have now been solved.
At the start of this week on February 6, the Hong Kong Economic Times reported that cross-border ETFs could materialise before the end of this month. CSRC's slip-up the following day has raised expectations further that their approval could be imminent.
The plan to introduce cross-border ETFs was revisited by China’s vice-premier Li Keqiang during his visit to Hong Kong last August. Their mention formed part of a broader set of measures announced to foster further cross-border investment, including the RMB qualified foreign institutional investor (RQFII) scheme launched last December.
Cross-border ETFs are viewed by Hong Kong investors as a scaled-down version of the experimental “through-train” programme announced in August 2007 to allow mainland investors to buy overseas stocks directly.
That programme, which was rapidly put on hold, helped to push the Hang Seng Index through the 31,000 point barrier within two months of being announced.
The plan to introduce a mainland-listed ETF linked to Hong Kong stocks has triggered heated debate in Hong Kong, but fund managers in China are less excited, noting there is scant demand for passive investment products and what little there might be is declining.