«ETFs – Lessons from a Twenty-year Success Story The 4th Indexing & ETF Investments Series Conference 2013 China Alexa Lam SFC’s Deputy Chief ...»
Nonetheless, a number of ETFs tracking Mainland A-share indices sprang up in Hong Kong soon after the inception of the QFII scheme. These ETFs adopted a synthetic replication strategy using derivatives that are issued on the back of QFII quotas. It has been unclear how Mainland authorities see this way of using QFII quotas. But these ETFs have proved to be a major success. The first one of them, tracking the A50 index, has grown exponentially since we authorised it in November 2004. With about USD20 million assets under management at launch, the size has grown to about USD9 billion at the end of January.
The success of these synthetic A-share ETFs shows that ETFs could be an effective channel to connect the Mainland and Hong Kong markets. Since 2009, we have been advocating the launch of reciprocal ETFs in the Mainland that would allow Mainland investors to access the Hong Kong market. As these synthetic A-share ETFs grew in size, post 2008, regulators in the Mainland and Hong Kong also became increasingly concerned about the counterparty risk to which the investors were exposed. We suggested to our Mainland counterparts a separate arrangement that would allow funds in Hong Kong to directly invest in the Mainland markets.
Two major breakthroughs came within the past year or so. At the end of 2011, Mainland authorities announced the RQFII schemes, giving quotas to funds established in Hong Kong to invest RMB in Mainland fixed income and equities markets. Soon after the successful launch of the scheme, Mainland authorities expanded the quotas to allow the launch of physical ETFs in Hong Kong that track Mainland equities indices. The first such RQFII physical ETF was authorised in June 2012, and another three have been authorised since.
Investors received these ETFs enthusiastically. At the end of January 2013, the assets under management of these RQFII ETFs totalled RMB47 billion. Among the five most actively traded ETFs listed in Hong Kong, two are RQFII ETFs.
The second breakthrough happened on Mainland exchanges. In October 2012, two Hong Kong-stock ETFs, tracking the Hang Seng China Enterprise Index and the Hang Seng Index, were listed on the Shanghai and the Shenzhen stock exchanges respectively.
Some have remarked that the reception of Mainland-listed Hong Kong-stock ETFs has only been lukewarm. But this is missing the point. The significance of the Hong Kong-stock ETFs in the Mainland and RQFII A-share ETFs in Hong Kong is that Mainland authorities have signed onto the idea that ETFs could play an important role in connecting the Mainland and Hong Kong markets, creating a new channel for two-way capital investment flows. Because of the many advantages of ETFs that I mentioned earlier, I believe that this would add further momentum to cross-border cooperation between the two markets and would open up major opportunities for the ETF industry in the Mainland and Hong Kong.
Clearly, this is an exciting development, and I encourage you to seize upon the opportunities this creates. You must remember, however, the success did not come easy. RQFII, for example, came after three years hard work by us and our Mainland counterparts. We were able to finally convince Mainland authorities to approve the scheme because Hong Kong has over the years accumulated a wealth of experience in the ETF space, that we have a robust regulatory regime, and that our industry has a stellar track record, not least in having weathered the financial crisis largely unscathed. Any misstep, however, could set us back in years. As you consider the next products that you wish to bring to the market, I hope you will pay special attention to the risks involved and how you plan to manage them.
The global ETF industry has enjoyed an excellent run since its birth just over twenty years ago. The industry offers a transparent, easy-to-understand product that gives investors access to a wide range of underlying exposure in a cost effective manner. Over the years, the industry has been innovating and improving tirelessly. Such innovations and improvements enhance the value proposition of the industry. There are a few instances where innovation has raised alarm. In most cases, the industry has been able to work with the regulators to address them. With some recent breakthroughs in Mainland-Hong Kong ETF cooperation, many more opportunities will arise. I urge you carry on the good work and bring the industry’s success to the next level.
With that, I would like to wrap up. I wish you all an enjoyable and useful conference today.