HKEX Insight

In the two years since ETFs were brought into Connect in July 2022, the total ADT of ETFs listed in the Hong Kong market has grown from HK$9.8 billion in July 2022 to HK$12.0 billion in June 2024.  

Southbound Stock Connect has helped drive that performance, with Southbound-derived ADT growing from HK$215.7 million in July 2022 to HK$1.0 billion in June 2024, according to HKEX data.

On 22 July 2024, six new ETFs will be added to Southbound Stock Connect and 85 new ETFs in Northbound Stock Connect, taking the total on each channel to 16 and 225, respectively, and marking an increase from the four on Southbound and 83 on Northbound Stock Connect when ETFs were first included in July 2022.

This new round of ETF inclusions in Stock Connect is a notable development, further diversifying the product ecosystems on both Northbound and Southbound Stock Connect; but it has been made possible by something of even greater significance: namely, the expansion of eligibility criteria for ETFs in Connect. 

That expansion, the first of five measures announced by the China Securities Regulatory Commission (CSRC) on 19 April 2024, will accelerate the growth of the ETF product ecosystem and increase options for global and Mainland Chinese investors to invest in ETFs listed on both Mainland China and Hong Kong markets. 

These revised criteria send two powerful messages to ETF issuers: firstly, that there is greater access to investor pools in Mainland China and international markets and, secondly, that issuers have room to innovate with new products to bring more diversity to the market.

Going forward, ETFs could become eligible for inclusion in Northbound and Southbound Connect with a lower average daily AUM, plus a lower proportion of Mainland-listed, Hong Kong-listed, as well as Stock Connect-eligible stocks.  

Here are the eligibility criteria in detail:

Southbound

Northbound

For example, the revised eligibility criteria for Southbound Stock Connect- and Northbound Stock Connect-eligible ETFs means that up to 40% of the benchmark index can be made up of securities that are not in the Connect system, so Southbound and Northbound investors can access a more diverse range of securities, including international securities, through eligible ETFs.

These rule changes are significant for issuers and encourage the creation of new products and innovation with new strategies to capture the potential growth of emerging industries such as artificial intelligence, quantum computing and new energy in China and around the world. 

These changes on the supply-side alone are exciting, but the potential for them to grow the market is even more invigorating. 

The performance of ETFs in Stock Connect over the past two years gives solid reasons for optimism. Simply put, investors in both Mainland China and internationally have responded with great enthusiasm. 

Since July 2022, for example, the ADT for ETFs on Northbound Stock Connect has grown from RMB20 million per day in July 2022 to RMB1.1 billion per day as of June 2024. ETF trading volumes on Southbound Connect have also flourished, with ADT rising from HK$216 million in July 2022 to HK$1.0 billion in June 2024, according to HKEX data. 

More fundamentally, Mainland Chinese investors remain underinvested internationally, and international investors remain underinvested in China, so there’s significant room for investment allocations to grow.  

For example, China’s offshore investment portfolio as a percentage of GDP was only around 6% in 2023, compared with approximately 70% in the US.

The new opportunities emerging from the changed ETF eligibility criteria could facilitate greater cross-border allocations, connecting China and the world, and vice versa. 

Additionally, the new criteria for ETFs in Connect dovetail with broader, fundamental shifts in the world of investing: namely, the global shift to ETFs.

Global ETF assets reached US$11.6 trillion in 2023, up 25.6% compared with 2022, according to ETFGI, due to cost advantages, ease of access and increasing traction around actively-managed ETFs.

With buoyant demand in Mainland China, Hong Kong and globally, the enhancements to the ETF eligibility criteria for Stock Connect point to a wave of market momentum in the coming years. 

And that’s a positive development for Hong Kong. 

The relaxing of the eligibility criteria for ETFs will help grow product diversity and liquidity in the ETF market and support Hong Kong’s continued development as the leading ETF marketplace in Asia. Meanwhile, greater accessibility to unique China themes will reinforce HKEX’s role as the key gateway to China investments. 

Additionally, the new ETF developments are yet another step forward to strengthening Hong Kong’s financial markets. In the past 12 months, we have seen cuts to stamp duty on stock transactions, the CSRC’s five new measures to support Hong Kong's market development, severe weather trading enhancements, reforms to the GEM market, the debut of FINI to speed up IPO processes and the launch of new consultations on corporate governance and bid-ask spreads in the cash market. 

Finally, the new ETF enhancements signal the ongoing commitment by HKEX, its Mainland partners and regulators to continue expanding the landmark Connect Programme. Celebrating its 10th anniversary in 2024, the Connect programme has expanded in depth and breadth across asset classes, connected China and the world more closely and strengthened Hong Kong’s position as a world-leading IFC.  

#1 HKEX: Inclusion of ETFs in Stock Connect

#2 HKEX: Expansion of Eligible ETFs on Stock Connect to take effect on 22 July

#3 HKEX: HKEX reaches agreement with Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) to expand scope of eligible ETFs under Stock Connect 

#4 HKEX: The inclusion of ETFs in Stock Connect ― Implications and opportunities

#5 Hong Kong Securities & Futures Commission: Launch of ETF Connect