China Expands Access to Stock Market with Introduction of 85 New ETFs via Cross-Border Trading

China is expanding access to its $8.4 trillion stock market by introducing 85 new exchange-traded funds (ETFs) tracking mainland equities through the cross-border trading channel for offshore investors. This move aims to provide global investors with more options to tap into China’s growing market. According to Morningstar, annual inflows to China ETFs have increased substantially over the past three years, reaching a total assets under management (AUM) of 1.82 trillion yuan ($261 billion) by the end of 2023. ETF Connect, a mutual market access program between Hong Kong and mainland China, allows investors from both sides to trade designated stocks, expanding cross-border investment channels.

The Stock Connect scheme, part of ETF Connect, has been instrumental in opening up China’s onshore market to global investors by gradually broadening its scope over the years. The program, established ten years ago, started with the Shanghai-Hong Kong Stock Connect in 2014, followed by the Shenzhen leg two years later. Subsequent additions such as Bond Connect in 2017 and the Wealth Management Connect scheme in 2021 have enhanced connectivity and facilitated cross-border investment opportunities. Investors participating in the Stock Connect scheme must adhere to mainland China’s regulations for offshore investors, with trading conducted in yuan under a daily quota of 52 billion yuan ($7.3 billion) for the Shanghai and Shenzhen channels.

Through ETF Connect, various ETFs have become available for northbound trading, including thematic ETFs focusing on sectors like consumer, healthcare, AI, and defense. The current number of eligible ETFs in the northbound leg is around 140, set to expand to 225 with the upcoming additions next week. For mainland investors, 16 Hong Kong-domiciled ETFs will be accessible through the southbound channel. The growing popularity of the program is evident, with the total trading volume of ETFs through the northbound channel reaching 102.7 billion yuan by the end of May 2023, nearly triple compared to the previous year. With monthly trading volumes exceeding 20 billion yuan in recent months, investors, both institutional and individual, have the opportunity to gain exposure to China’s onshore market through ETFs listed on the Hong Kong stock exchange.