The two Shenzhen-listed ETFs invest 90% of their NAVs in the Hong Kong-listed ETFs through the QDII scheme
The two Shenzhen-listed ETFs invest 90% of their NAVs in the Hong Kong-listed ETFs through the QDII scheme © Bloomberg

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Almost four months since the launch of a new exchange traded fund master-feeder framework between Hong Kong and mainland China, there appears to be no timeline for more product launches under the scheme.

Four managers in China and Hong Kong — CSOP Asset Management, Hang Seng Investment Management, Harvest Fund Management and Yinhua Fund Management — paired up to list four ETFs on the Hong Kong and Shenzhen exchanges in October, after the programme was first established in August.

Under the master-feeder structure, the ETFs from Hang Seng IM and CSOP AM allocate at least 90 per cent of their net asset values in the Shenzhen-listed ETFs using the renminbi qualified foreign institutional investor (RQFII) scheme. The two ETFs from Harvest FM and Yinhua FM will also invest at least 90 per cent of their NAVs in the two Hong Kong-listed ETFs via the qualified domestic institutional investor (QDII) scheme.

The four ETFs, two each listed in Hong Kong and Shenzhen, had amassed around Rmb842m ($129m) in assets, collectively, as of December 16.

This article was previously published by Ignites Asia, a title owned by the FT Group.

“This scheme has been relatively successful, it’s still in [its] early days, we are only a couple months into this programme,” Brian Roberts, Hong Kong-based head of ETF business for the Stock Exchange of Hong Kong, said in a Bloomberg webinar earlier this month. “These ETFs are trading relatively well.”

The products listed in Shenzhen that feed into the master funds in Hong Kong account for the majority of asset inflows, taking advantage of a much bigger captive market in China, but also indicating a strong interest from mainland investors for ETFs from offshore markets.

The Shenzhen-listed Yinhua ICBC CSOP S&P China New Economy ETF has been the most successful of the launches, amassing Rmb643m in assets under management by December 16, Wind data show.

It is followed by the Shenzhen-listed Harvest Hang Seng China Enterprise ETF with Rmb100m as of the same date.

The Hang Seng Harvest CSI 300 Index ETF had Rmb81.3m, while the CSOP Yinhua CSI 5G Communications Theme ETF had Rmb17.7m.

But the four new products’ modest success does not hold a candle to the most popular ETFs launched this year in China and Hong Kong.

In Hong Kong, the CSOP Hang Seng Tech ETF raised $396m in the first month after it was launched in August.

In mainland China, investors ploughed $10.76bn into the ChinaAMC CSI New Energy Car Index ETF in the first month after its launch in early March, according to data from Morningstar Direct.

Keith Chau, Hong Kong-based partner at PwC, said assets raised by the four feeder ETFs were “generally pretty decent” but it would take time for the format to gain traction.

BlackRock, Mirae Asset Global Investors and Haitong International Asset Management, which are among the largest ETF providers in Hong Kong, did not immediately respond to requests for comment about what plans they had, if any, to participate in the scheme.

The pilot Hong Kong-China ETF master-feeder scheme was launched by regulators in both markets, partly to stand in for the much-anticipated ETF Connect, which was first touted in 2016 but has yet to come to fruition because of various trading issues, including a divergence in settlement procedures in the different exchanges.

The master-feeder scheme presents its own challenges in that companies need to identify and agree terms with their partners. The semi-autonomous territory Hong Kong is part of China and has close ties, but companies in the two markets operate in completely different financial environments.

Among those already participating, CSOP AM said it was interested in making further use of the programme, but did not give details of when the next product launch could be.

Hang Seng IM did not respond to queries about further ETF launches, saying only that it would “closely monitor the latest developments” before deciding its future strategy.

Some providers outside the scheme said they wanted to build a clearer picture of how successful the master-feeder scheme was before deciding whether to participate.

Rebecca Chua, founder of Premia Partners, said Premia would like more time to observe “the feasibility and effectiveness of the scheme”.

Alex Yang, Hong Kong-based vice-president of institutional solutions for Samsung Asset Management, said a broader investment scope could attract more mainland investors.

The two Shenzhen-listed ETFs in the scheme feed into Hong Kong products that track mostly Hong Kong and US-listed Chinese firms, such as Tencent, Alibaba and China Construction Bank.

Mr Yang said mainland investors lacked access to ETFs that offered exposure to multiple overseas markets in one product, and Samsung AM was researching opportunities under the scheme and was in active discussions with potential onshore fund managers.

Among the mainland Chinese fund managers, Harvest has expressed “confidence” in the programme but has not made it clear whether there will be any further product launches, according to Chen Zhengxian, the company’s index investment director.

The fact that the Shenzhen-listed products are still required to use their QDII quota means mainland managers will want to make maximum use of their chosen investment strategy. The QDII scheme allows licensed Chinese financial institutions, such as fund houses and securities firms, to use the quota allowance they have been granted to invest in foreign securities markets.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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