Year of the Pig reflection: The fate of ETF Connect

For this Year of the Pig reflection, we look back at our forecast of whether China's ETF Connect was likely to open during 2019.
Year of the Pig reflection: The fate of ETF Connect

At the beginning of every Chinese New Year AsianInvestor makes 10 predictions relating to economic, geopolitical or investment issues that will affect how investors make their major decisions. Then, at the end of the year, we look back to how accurate these predictions were.  

Our second revisiting of our Year of the Pig predictions focuses on whether China would finally launch its much anticipated ETF Connect, several years after having last launched the Stock Connect and then Bond Connect platforms. 

Will the ETF Connect between China and Hong Kong finally open? 

Answer: No

We were bang on the money with this prediction. For all the anticipation of China launching a trading avenue that would let international investors get access to local index-focused, exchange-listed products (and vice-versa), there were no real signs during that year that ETF Connect was ever going to take off. 

These are long-running problems preventing the launch. In 2016, then-HKEX chairman Charles Li talked of ETF Connect taking place the following year. But since then there have been few signs of progress, despite the occasional piece of positive news. 

Fund executives believe the problems surrounding the concept have been substantial. There have been myriad regulatory differences between Hong Kong and China's approach to ETFs to consider for a start. Perhaps more difficult has been how to bridge the two market's varying approaches to settlement. China's trading and settlement of ETFs is on a T+0 basis, meaning they trade and are settled on the same day, while in Hong Kong it takes two days.

But that is unlikely to be the only problem. After all, as Li noted, it would have been possible to create a T+1 compromise for ETFs through the creation of a cash recognition unit. And indeed, there has also been speculation that China's stock exchanges won't play ball unless Hong Kong prevents mainland investors from accessing international ETFs listed on the HKEX. This, it's claimed, is largely because the Shanghai Stock Exchange in particular wants international ETFs to list directly with it. If this is a sticking point, it's evidently proving a large one. 

What can be said with some certainty is that ETF Connect has ceased being a concept that gets much (if any) mention by the HKEX or Chinese authorities.

This is a shame, because the inclusion and gradual increase of the weighting of China's A-share market in international benchmarks such as MSCI's Emerging Market Index mean that asset owners and fund houses across the world need to include quantities of local mainland shares into their portfolios. And while many might well prefer to do so via active investments (a sensible choice, given the volatile and information inefficient nature of China's market) some investors may well prefer to get less expensive forms of access. 

Despite the lack of clarity surrounding Beijing's commitment to launching ETF Connect, its broader interest in ongoing reform suggests that the platform will eventually come to fruition. But when that exact day will be is anybody's guess. Ours? 2021 at the earliest - provided both sides rediscover some of the will to build it.

Previous Year of the Pig reflections: 

Will the US economy suffer a major downturn? 

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