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A-shares market – how will Ireland lead the way in Europe?

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A-shares market – how will Ireland lead the way in Europe?

Capitalising on investment and distribution opportunities in China

Lisa Kealy, EMEIA ETF lead and FSO assurance partner was invited to participate as a panellist at the IFIA Hong Kong Seminar on Tuesday, 19 May to explore topics such as capitalising on China A-Shares via Stock Connect, RQFII and ETF’s. Lisa also presented at our EY ETF industry conference in Hong Kong the following day. The focus of the presentations included the new and exciting initiatives for distribution, access and investment into the Chinese markets.

ETFs – the Asian opportunity

Lisa spoke about the growth of global ETF industry and how it continues to deliver innovative solutions to investors in global capital markets. Having delivered a 26% compound growth rate over the last 4 years, ETF’s continue to be the fastest growing asset class around the globe. However at only 8% of the mutual fund industry there is still significant room for growth.

Hong Kong has become the domicile of choice for international investors and is substantially larger than Singapore.  The lifting of the Hong Kong Stamp duty on ETF’s in February this year has aided flows. The Hong Kong market could potentially un-tap latent growth, if they lifted the ban on National Retirements Scheme and investment in ETF’s. A similar ban was lifted on Singapore earlier this year and it is thought this will have a significant impact on the industry. Equally important, their liquidity and nearly instantaneous trading is favourable to Hong Kong investors, most of who trade intraday.

ETF’s are a unique product, with a potentially huge role to play in the recovery of the European economy in a post financial crisis world.   A great news story for us here in Ireland as 50% of all European ETFs are domiciled here, with Luxembourg the second largest domicile having 17% of funds domiciled.

Distribution opportunity – The Mainland-Hong Kong Mutual Recognition of Funds initiative

With distribution a top priority for all international managers, it is hardly surprising that The Mainland-Hong Kong Mutual Recognition of Funds initiative, which will be launched on 1 July 2015, is capturing the attention of local and global managers.  This program will allow distribution of mainland China and Hong Kong funds to retail investors in each market.  A massive opportunity for Hong Kong, given the doors will open to 1.4bn cash rich Chinese investors who, up until now have been starved of product choice.

Eligible Hong Kong-domiciled funds, including physical index-tracking ETFs, will be able to be sold into mainland China.  This will further encourages managers to select Hong Kong as their choice of domicile for new ETF products for the potential of selling such products into the mainland Chinese markets. In an exceptionally concentrated global ETF market there is significant room for growth as this very new Asian market, which offers a far more open economy.  Many local managers are launching local HK ETFs in large numbers in preparation for this opportunity to access Chinese investors, who offer a whole new distribution arm.

Investment opportunity – QFII / RQFII and Shanghai-Hong Kong stock connect programs:

As the Chinese markets begin to liberalise, it is not surprising that managers view with great excitement the opportunities which are opening up to enable European managers to both to distribute our funds to and invest in this cash rich economy.  The second largest economy globally, historically has been largely inaccessible for cross boarder distribution and investment, with local Chinese investors starved of foreign product.  This is now a thing of the past…….

Regulators in recent years have relaxed certain market restrictions and distribution channels such as the QFII (Qualified foreign institutional investor) or the RQFII (Renminbi qualified foreign institutional investor) programs. The RQFII structure in particular has enabled international investors to access the China A-shares market (RMB denominated domestic equities and bonds) directly through ETF’s.   Ireland was the first domicile to approve and launch a China A shares ETF.  The very first European ETF was domiciled in Ireland, and the launch of China ‘A’ share ETF shows that Dublin remains a hub for innovation.

The opening up of the Chinese domestic equity market has been significantly further enhanced with the launch of Shanghai-Hong Kong Stock Connect  in November 2014.  This is only the first step in a gradual opening of China’s capital markets to international investors.  This program connects the Hong Kong and Shanghai exchanges, enabling international investors trading through Hong Kong  access the previously hard to access Chinese domestic equities with ease.  In particular without the need for RQFII / QFII quotas or licences / reporting requirements for investors.  Up until its launch, China A-Shares listed on the Shanghai, have historically only been available to purchase by Chinese nationals or through the QFII or the RQFII programs.

The international investment into the Shanghai Stock Exchange (SSE) leads to increased integration of China’s capital markets into the global economy. It gives investors around the world greater access to China’s growth trajectory via previously unavailable exposure to a broad range of Chinese equities.  As the Shanghai-Hong Kong Stock Connect matures its impact and significance will spread as investors drive the demand on the ground.

So where does it go from here?  The expectation is that following on from this successful implementation, other exchanges will follow.  The Shenzhen-Hong Kong Stock Connect is expected to launch as early as Q4 with many managers poised to invest in this once elusive market.  Singapore, Taiwan and many others are also bracing themselves to follow.  It is also expected that the eligible assets, currently restricted to selected equities, will expand to include bonds and other asset classes.  Bonds are expected to be offered in upcoming phases, giving US and European manager’s access to high yield securities, and a piece of this markets growth trajectory.  Expectation is also that once established China A shares will become part of global indices offered by MSCI and FTSE.

In closing Lisa noted, that there is significant opportunity for Ireland.  The opening of the A-shares market is a really exciting opportunity for ETFs.  The success of the stock connect is inspiring a wave of cross boarder exchange initiatives involving China, Asia and beyond.  As boarders open up and the opportunities to invest in and distribute to China emerge, Ireland needs to ensure we continue to work with regulators to get the best result for Ireland and to lead the path for Europe.  Ireland is a leading domicile of both mutual funds and ETFs around the globe and as distribution channels and investment opportunities increase, our assets under administration are set to flourish.

Lisa Kealy

Wealth & Asset Management, Sector Leader
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