Race is on to list first Stock Connect ETF

Two Chinese firms are vying to list the first ETF to buy Hong Kong stocks through the trading link. It has been suggested their moves are the result of regulatory encouragement.
Race is on to list first Stock Connect ETF

China Asset Management and China Southern Asset Management are racing to list the first exchange-traded fund via the Shanghai-Hong Kong Stock Connect, after getting regulatory approval last week.

But this comes amid muted initial volumes for the trading link, leading to suggestions that the mainland securities regulator has encouraged the moves to help promote the scheme.

Classed as qualified domestic institutional investor (QDII) products, they will be cheaper and will have quicker settlement cycles than existing QDII ETFs. They will trade through Stock Connect until the cap is reached, then they can use QDII quota.

China Southern, the fifth biggest mainland fund house with assets under management of Rmb200 billion ($32.5 billion), got the green light from the China Securities Regulatory Commission (CSRC) on December 2.

Approval came the following day for China AMC, the country's second largest fund manager with Rmb348 billion.

Both firms plan to launch ETF products tracking Hong Kong's Hang Seng Index using the southbound quotas of the Stock Connect trading link. China AMC’s new fund will join its existing Hang Seng ETF that buys Hong Kong equities via the QDII scheme, while this will be the first such fund for China Southern.

Each product will charge a 0.5% management fee and 0.1% custody fee; these are 25% lower than existing QDII equity ETFs. They will be classed as QDII funds.

The launch plans are probably due to regulatory encouragement rather than investor demand, said January Sun, an analyst at Shanghai-based Z-Ben Advisors. “The firms want to be first movers and draw market attention.”

The two firms are big names in China that have strong relationships with the regulators, Sun noted.

They will both start fundraising tomorrow, but neither has confirmed a listing date. Normal procedure is to register the product and wait for listing approval from the CSRC. The regulator accepted both fund applications in early October.

The ETFs share similar features and target the retail market, with a minimum investment of Rmb1,000. Stock Connect requires individual investors too have a brokerage account balance of at least Rmb500,000, which only accounts for 5% of mainland domestic investors.

Market observers have pointed out the China Southern fund's purchase settlement time will be T+1, not T+0, as was previously rumoured would be the case for Stock Connect ETFs. But that is quicker than existing QDII ETFs' typical time of T+2. At present, only bond, gold and money-market ETFs are allowed to trade at T+0 in China onshore equity market.

However, the CSRC has not made a final decision on the settlement time, which could change before the listings take place, said a source.

Asked if it would launch an actively managed fund via Stock Connect at some point, China Southern declined to comment.

Since Stock Connect went live on November 17, southbound trading volume has been muted. Only 2% of the Rmb250 billion aggregate quota had been used as of last Friday (December 5), while 18% of the Rmb300 billion quota for northbound trades had been used.  

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