Overview

Hong Kong’s securities regulator has recently made headlines by easing restrictions on the sharing of research regarding mainland China-listed exchange-traded funds (ETFs). This pivotal change aims to enhance access to valuable investment information for local investors engaging with ETFs available through the Stock Connect schemes.

Background on ETF Connect

Launched in July 2022, the Hong Kong-China ETF Connect was designed to facilitate mutual access to select ETFs across Hong Kong and mainland China exchanges. Despite its potential, growth for the initiative has been stunted due to stringent regulations that limit fund firms from promoting their ETFs beyond borders. Furthermore, intermediaries faced significant restrictions in distributing ETF product information to potential investors.

Recent Regulatory Changes

However, the tide has turned! The Hong Kong Securities and Futures Commission (SFC) has announced a groundbreaking circular that clarifies how research reports on eligible ETFs within the ETF Connect framework can now be shared with end investors. This step is seen as a reciprocal arrangement, following similar clarifications from the China Securities Regulatory Commission (CSRC) regarding the distribution of research reports for Hong Kong ETFs.

Guidelines for Research Reports

The new guidelines stipulate that these research reports will no longer be classified as advertisements, which have been tightly controlled under Hong Kong's Securities and Futures Ordinance, provided certain criteria are met. Specifically, a report must be authored by licensed intermediaries and must present information that is factual, fair, balanced, timely, and consistent with the offering documents of the respective mainland ETFs.

Recommendations and Compliance

Furthermore, the SFC specifies that research reports may include recommendations on buying, holding, or selling ETFs, as long as these opinions are backed by reasonable justifications. This significant shift addresses previous regulatory concerns about potential cross-promotion and ensures that intermediaries take due diligence in selecting and overseeing their partnered CSRC-licensed group companies for compliance with applicable laws and standards.

Growth of HK-China ETF Connect

Since its inception, the HK-China ETF Connect has expanded from 87 eligible products to now include over 141 mainland-listed ETFs. This growth comes in parallel with a recent agreement in April between stock exchanges in Hong Kong and China to relax the requirements for ETFs included in the Stock Connect schemes.

Industry Insights

Tom Digby, the head of ETF business development and capital markets for Asia Pacific at Invesco, remarked on the swift action of the Hong Kong authorities in enhancing the ETF Connect scheme. He noted that while the expansion is promising, ETF issuers still face significant challenges in navigating authorization and marketing across both regions.

Conclusion

This exciting development not only enriches the landscape for investors in Hong Kong and mainland China but also signals a shifting paradigm in cross-border investment opportunities. As the barriers to sharing vital information continue to fall, savvy investors may find new avenues for growth and diversification in their portfolios!