With the Hong Kong Securities and Futures Commission and the China Securities Regulatory Commission approving the much anticipated Shenzhen-Hong Kong Stock Connect program, China is opening up its capital markets and could ultimately benefit investors seeking exposure to Chinese markets through A-shares-related exchange traded funds.
The Shenzhen-Hong Kong link effectively removes one of the obstacles for accessing mainland Chinese stocks, or A-shares. The link, which will be operational by the year-end, will add 880 companies to the 567 already available to investors through the Shanghai link that opened back in 2014, opening up about 70% of mainland market capitalization, the Financial Times reported.
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Meanwhile, mainlanders will have access to 417 Hong Kong-listed stocks, a third more than the through the Shanghai link, with the addition of small-caps.
“For A-Share ETFs, or ETFs with A-Share exposure, the Shenzhen-Hong Kong Stock Connect will provide a wider channel to access the A-Share market, expanding to stocks listed on the Shenzhen Stock Exchange,” writes Morningstar ETF Strategist Jackie Choy. “As a result, ETFs could potentially reduce their reliance on their existing QFII/RQFII quotas. However, their ability to do so would remain constrained by the daily quota in place.”
Consequently, with market opening up and potentially allowing for greater competition, the Shenzhen link could serve to diminish trading costs as well as management fees for China A-shares ETFs for investors.