ETF Connect uncertainty persists amid headwinds
Whether the long-awaited ETF Connect trading link between China and Hong Kong will go live this year remains unclear, with neither industry participants nor regulators shedding any light on what progress is being made.
This is perhaps understandable given the coronavirus outbreak took hold last month, with US-China trade spat concerns having only just receded on the back of a phase one deal, and amid simmering tensions after months of anti-Bejing protests in Hong Kong.
Asked by AsianInvestor for an update on the ETF Connect's likely launch date, a spokesman for Hong Kong's Securities and Futures Commission declined to comment on the project's progress or on whether the virus outbreak was causing any delay.
He said only that the regulator had been working closely with the China Securities and Regulatory Commission and mainland and Hong Kong exchanges on the scheme. “We will continue to work with relevant parties on studying and pushing for its implementation as well as the feasibility of ETF cross-listing,” he told AsianInvestor.
Hong Kong Exchanges and Clearing did not shed any more light. An HKEx spokeswoman told AsianInvestor that the bourse continued to support all developments that it believed to be in the best interests of the region’s financial markets, investors and issuers.
TECHNICAL ISSUES PERSIST
Yet unresolved issues remain for the trading link around transaction settlement schedules and questions over which underlying assets will be tradable through ETFs within the scheme.
Another issue now under debate is whether the new trading link – originally planned as an extension of the Shanghai and Shenzhen Stock Connects – should operate using cross-listings rather than, as per the existing schemes, the secondary market.
Cross-listing has emerged as an option in case the original concept ended up being unfeasible. But apparently some players, particularly smaller ones, are concerned about the potential operational costs of switching to that setup.
The ideal approach would be to adopt the model like that of the Stock Connects rather than using cross-listing, as it would be more meaningful to investors and issuers, said Sally Wong, chief executive of the Hong Kong Investment Funds Association.
“The Connect model is much simpler in terms of operational and regulatory requirements, as well as infrastructure set-up,” she told AsianInvestor. “Managers can leverage an existing well-understood infrastructure and ecosystem. [That approach offers] higher cost efficiency and effectiveness.”
Patrick Wong, head of China business development at HSBC Securities Services, agreed that the simplest way to implement ETF Connect would be by using the secondary market. This approach would not necessitate a review of listing rules and licensing issues, he noted, unlike cross-listing.
However, cross-listing would be more beneficial from a fundraising perspective, as it would mean ETF units being created at the primary level, HSBC's Wong said.
HOPES FOR RESOLUTION
The SFC is hoping to resolve some of the technical issues around ETF Connect this year to facilitate the launch, Julia Leung, the watchdog’s deputy chief executive, said at the Asian Financial Forum (AFF) last month, reported the South China Morning Post.
That includes deciding on which underlying assets the regulators will permit as part of the mechanism, from a range including fixed income, stocks, precious metals, and technology indices.
Another obstacle – a longstanding one – is that China operates on a T+0 basis (trading and settlement taking place on the same day) while in Hong Kong it is T+2 (settlement two days after trading).
However, James Henry Lau, Hong Kong’s Secretary for Financial Services and the Treasury, who was also present at the AFF, was quoted by the SCMP as saying no timetable had been set for the launch.
AsianInvestor correctly predicted that ETF Connect would not go live last year; circumstances don't seem to be working in the scheme's favour so far in 2020 either.
Some remain optimistic the link could launch this year. Stewart Aldcroft, senior fund industry adviser at Citi in Hong Kong, said: “The technical difficulties are mainly administrative. Once they have been ironed out … I think things can move forward relatively quickly.”
But that may depend on bigger questions being resolved. Beijing and Hong Kong are clearly more concerned right now about managing cross-border relations and containing the coronavirus than facilitating ETF investment.