Strong pent-up demand exists for fund management products which “100% use Stock Connect” said Conrad Cheng, Bosera’s Asset Management's deputy CEO at an AI event.

Expansion of the scheme to Shenzhen and Taiwan may be the catalyst needed to spur more product launches

Speaking on a panel at Asian Investor’s Stock Connect 360 conference, held last week in Hong Kong, Cheng claimed that during recent trips to the US and Europe, 90% of asset owners asked him when Bosera would launch products that solely use Stock Connect.

Cheng cited the limited universe of securities available via the scheme as a key barrier to designing “meaningful products”.

“We have to wait until Shenzhen Connect comes into force” he said. The Shenzhen exchange hosts many of the small cap and TMT Chinese stocks.

Also on the panel, Liu Jian, head of business development at CSDC’s Hong Kong subsidiary ChinaClear, said that small caps have been evaluated but that he didn't know whether there would be a minimum market capitalisation, such as 20 billion renminbi which some market participants have speculated. 

Cheng was hopeful that the range of trading instruments would also be expanded: “Personally, I feel that the first thing that should be considered is to include ETFs,” but he acknowledged that these products are not popular with retail investors.

Liu confirmed that the second phase of Shanghai-Hong Kong stock connect “will be the same as Shenzhen connect” and include secondary trading of ETFs but not creation and redemption, referring to primary market creation of new – and redemption of old – ETFs by market makers.

Karl Paulson Egbert, partner at law firm Dechert, observed that ETFs haven’t been included in the first batch of funds that his firm’s clients are submitting for mutual recognition “but it’s at least possible” for them to do so.

He added that ETFs already have “a cross-border clearing and settlement platform”. In contrast, “if you are looking to sell your mutual fund across the border then you have to basically use your custodian as a clearing and settlement platform”.

Apart from the limited universe of securities available, Cheng said that the other hurdle to launching products aimed at trading via stock connect was the difficulty predicting how index compilers would respond in the event of changes to the quota allowed to be traded via stock connect.

Cheng explained that currently Bosera is using its RQFII quota to design products which invest in China’s onshore bond markets, and focusing on stock connect for equity funds. “Hardly anyone is actively pondering about using QFII” among small asset owners said Cheng.