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Authored by: Pinky Siu
More than one month has passed since the launch on 4 July 2022 of the long-awaited connect scheme for trading exchange-traded funds (ETFs) between Mainland China and Hong Kong (ETF Connect). While ETF managers have been assessing how they can benefit from the scheme to enhance their cross-border product offering, a few limitations of the ETF Connect scheme are noted.
One of the common concerns is the stringent eligibility criteria, making it quite difficult for an ETF to be included in the scheme. At the initial stage, the Shanghai and Shenzhen stock exchanges have only added four Hong Kong-listed ETFs that can be traded by Mainland investors, and 83 Mainland-listed ETFs can be traded by Hong Kong and international investors via ETF Connect. For details about the ETF eligibility criteria, please refer to our client alert.
In addition to the scope of the ETF Connect being narrow at its initial launch, ETF managers are also wary about the inability for them to market their ETF products. Since ETF Connect is implemented by way of inclusion of eligible ETFs into the existing Stock Connect framework and infrastructure, it is only an expansion of the existing trading facility for mutual access of the Mainland and Hong Kong stock exchanges. In other words, the “connectivity” rests with the secondary market trading only. The ETF Connect scheme itself does not enable cross-border sale and marketing of ETFs.
Having said that, it does not mean that it is impossible to market and offer Mainland-listed ETFs to the public in Hong Kong at all. Under the current regulatory framework, fund houses that wish to bring their Mainland-listed ETFs to the Hong Kong retail market will need to get their funds authorised by the Securities and Futures Commission (SFC) in Hong Kong. The following traditional means remain available to them:
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