ETF Connect, an expansion of the Stock Connect mutual market access scheme between mainland China and Hong Kong, is expected to attract US$180 billion in northbound and southbound trading over the next 10 years.

While its market impact may be limited in the short term, the scheme has much room to grow as investor interest in exchange-traded funds (ETFs) continues to grow on both sides of the border.

The market started with a bang, with the 87 products on offer recording a total turnover of 28.53 billion yuan (US$4.23 billion) on the first trading day on July 4. Of the products included in the scheme, 83 are A-share ETFs and only four are Hong Kong ETFs.

The heat quickly cooled down, however. Northbound net inflow dropped 84% from 148 million yuan on the first trading day to 23 million yuan on July 5, while southbound fell 57% from 84 million yuan to 36 million yuan. On July 6, the flow picked up a bit at 25 million yuan northbound and 48 million yuan southbound. It stayed in a range of 5 to 20 million yuan in the following days.

This is not surprising. The Shanghai-Hong Kong Stock Connect recorded similar slumps in turnover shortly after it was officially launched in November 2014. Still, the market remains positive on the outlook of ETF Connect in the long run.

“As the only global custodian and administrator servicing all major ETF markets, we believe ETF Connect will increase access and liquidity for ETF issuers, authorized participants, market makers and investors,” says Pauline Wong, head of Hong Kong at State Street. “Each time we have witnessed expanded access, it has led to growth and broadened adoption. We expect to see the same with ETF Connect. It should strengthen ETF flows in Hong Kong and enhance onshore Chinese investors’ offshore exposure.”

Goldman Sachs predicts that ETF Connect will attract US$130 billion in northbound trading and US$50 billion for southbound in 10 years.

Optimism over the scheme is based on the strong overseas investors’ demand for access to the China market. In terms of assets under management, overseas ETFs investing in A shares have been expanding since 2020. “We see this move (the launch of ETF Connect) granting global investors more direct and efficient access to Hong Kong and mainland China’s rapidly developing ETF markets, which in turn will bring more liquidity and opportunity to Hong Kong’s market,” says Wong.

In addition, compared to other Chinese access schemes like the Qualified Foreign Institutional Investor (QFII) programme, the ETF Connect, which is open to both institutional and retail investors, has a lower investment threshold and is easier to enter.

Wong elaborates: “ETFs continue to be an important innovation in the investment landscape for both retail and institutional investors. The inclusion has the potential to widen the variety of traded products and provide more investment opportunities at greater convenience for investors. As a direct result of the inclusion, we foresee a growing trend in ETF product development. This means that broadening the scope of eligible ETFs will be crucial – especially the Hong Kong-listed ones – so that more players can partake. We are optimistic that the ETF Connect scheme will gradually see further expansion over time, and we look forward to more opportunities and options for investors.”