Explainer | What is ETF Connect? How does it help global investors tap China’s stock market?

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China is further opening up its stock market by offering 85 new ETFs tracking mainland equities through the cross-border trading channel for offshore investors next week

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ETFs, which are funds that pool together a basket of securities and aim to offer returns that mirror the underlying market, are becoming increasingly popular in Asia. Photo: Shutterstock

Jiaxing Li

Published: 6:00am, 16 Jul 2024

China is further opening up its US$8.4 trillion stock market by offering more options to global investors – 85 new exchange-traded funds (ETFs) tracking mainland equities are set to become available through the cross-border trading channel for offshore funds next week.

ETFs, which are funds that pool together a basket of securities and aim to offer returns that mirror the underlying market, are becoming increasingly popular in Asia. These transparent, low-cost, and diversified investment products are especially favoured by retail investors, with mainland China being one of the fastest-growing markets in the region.

Annual inflows to China ETFs surged almost fivefold over the past three years, bringing their total assets under management (AUM) to 1.82 trillion yuan (US$261 billion) by the end of 2023, according to Morningstar.

What is ETF Connect, and how does it work?

Hong Kong and mainland China launched their so-called mutual market access programme 10 years ago to allow investors on both sides to trade designated stocks in each other’s markets. The programme, also known as the Stock Connect scheme, has been playing a key role in opening up China’s onshore market to global investors.

To enhance the connectivity and expand cross-border investment channels, the scope has gradually broadened over the years. It started off with the Shanghai-Hong Kong Stock Connect in 2014, and this was followed two years later by the Shenzhen leg of the mechanism. Bond Connect arrived in 2017 and the Wealth Management Connect scheme in 2021.