According to the joint announcement made at the end of last year by the Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC), an agreement was reached between the Hong Kong Exchanges and Clearing Limited, Shanghai Stock Exchange, Shenzhen Stock Exchange, and China Securities Depository and Clearing Corporation, on the general arrangements for further extending Stock Connect to include eligible ETFs. It was estimated that the follow-up business and technical preparations, such as amendments to the relevant rules and public consultations, would take approximately six months to complete (i.e. around mid-2022). Since the Shanghai-Hong Kong Stock Connect programme was introduced in 2014, the investment scope and capitalization have been expanded over time. Turnover of both southbound and northbound trading has been on a sustainable growth trend. In particular, the former has already reached a more than significant percentage of the overall stock market turnover in Hong Kong. We believe that ETF Connect will follow the footsteps of Bond Connect to become yet another positive catalyst for the Hong Kong market.

ETF Connect can support the development of more diversified and convenient investment choices for Hong Kong and mainland China investors in terms of cross-border investment restrictions, product design, investment strategy and style. It allows retail investors to invest, through ETFs, to gain exposure to different asset classes of various risk/return profiles. For certain stocks which are not eligible to be traded under Shanghai Stock Connect and Shenzhen Stock Connect, ETF Connect can allow investors to indirectly capture the return opportunities from such stocks and participate at affordable costs in those market segments which were previously restricted to only certain institutional investors (through QDII and QFII/RQFII to buy and sell mainland China and Hong Kong stocks which are not eligible to be traded under Stock Connect).

Moreover, there are differences in product design, investment strategy and style, between the ETF products in Hong Kong and mainland China. Some ETF products may not be available in both markets. The launch of ETF Connect can complement the strengths and weaknesses of the ETF products in both markets, enhancing portfolio diversity for the benefit of investors. For example, in the Hong Kong market, one can hardly find the like of those mainland China-listed ETF products tracking indexes with exposure to various subsectors, such as the entertainment, medical equipment and services, and defense industries. Hong Kong investors can capture the opportunities through the ETF products relating to such subsectors. Likewise, Hong Kong-listed ETF products with exposure to overseas markets, inverse and leveraged investments, and overseas bonds, are not available in in mainland China. These products can also enrich mainland China investors with more investment diversity.

ETF Connect may help improve the market size and liquidity for related products, boosting the development of the ETF market

Given the scarcity of certain products in the Hong Kong and mainland China markets as mentioned above, as well as their differences in respect of investment preferences, strategies and styles, we anticipate that the launch of ETF Connect will be beneficial for bringing positive structural changes in the investor universes in the two markets. This may in turn help improve the market size and liquidity of related products, which is conducive to the further development of the ETF market.

Based on the southbound trading data, its daily turnover as a percentage of the overall turnover of the Hong Kong stock market rose sharply from less than 1% in November 2014, when Stock Connect was officially launched, to over 12% in 2021. Meanwhile, the daily turnover of the Hong Kong stock market also surged from HK$68.8 billion in 2014 to HK$166.3 billion in 2021. Hence, under the support of capital flows from the mainland China since the inception of Stock Connect, there has been a huge boost to the liquidity of Hong Kong stocks. Also on the rise has been the role played by mainland China investors on Hong Kong stocks. We expect a similar scenario may happen amid the launch of the ETF Connect. The Hong Kong ETF market is likely to benefit from the active participation of mainland China investors and make significant progress in respect of scale, quality and liquidity. A more developed ETF ecosystem will, in turn, have a positive knock-on effect on the liquidity of Hong Kong stocks.

In view of such positive impacts of ETF Connect, more ETF providers are likely to join the blossoming market, introducing more diversified products to provide more investment choices to both Hong Kong and mainland China investors. The increase in the investor base would be the incentive for ETF providers to attractive even more ETF participants to enhance the liquidity of ETF products.