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Asia ETF Roundup (Industry) – May 2020

HSI and HSCEI to add WVRs and Secondary-listed companies. Leveraged/inverse products on A-shares to come to Hong Kong

Jackie Choy, CFA 04/06/20

For economic and market news relating to Asian ETFs, please refer to our “Asia ETF Roundup (Market) – May 2020”.

ETF Industry News

HSI and HSCEI to Add Weighted Voting Right and Secondary-Listing Companies in August Review

Hang Seng Indexes announced the consultation results on the eligibility of weighted voting right companies (WVRs) and secondary-listed companies for inclusion in the Hang Seng Index and the Hang Seng China Enterprises Index (HSCEI). The index provider concluded the following:

  • HSI and HSCEI: Greater China WVRs and Secondary-listed Companies to be eligible
    • Individual constituents capped at 5%. This compares to the 10% cap currently imposed on other constituents.
    • WVRs: Shares with weighted voting rights will be considered as non-free float shares
    • Secondary-listed companies: Market capitalization based solely on Hong Kong registered portion and Hong Kong shares held by a depositary as underlying for overseas depositary receipts will be considered as non-free float shares.
    • HSCEI: Aligning the selection criteria for all share classes
      • Removing the additional eligibility criteria on Red-chips and P-chips that was imposed since 2018 when Red-chips and P-chips were first added. The existing additional eligibility criteria include listing history, price volatility and financial performance.
      • Number of constituent changes will be capped at three in the first review to control index turnover.  
      • HSI: No change to positioning and composition
        • Remain to represent the Greater China companies listed in Hong Kong.
        • No weight/ratio limits imposed on HK/Mainland China constituents and financial stocks.
        • The changes will be implemented in the August 2020 index review. Further details can be found in the detailed consultation report.

As alluded in the consultation paper, Xiaomi (01810), Meituan (03690) and Alibaba (09988) are the WVRs listed in Hong Kong, where Alibaba is also a Greater China secondary-listed company in Hong Kong. These are likely candidates for inclusion to the HSI and HSCEI. The HSCEI will see more changes as the additional eligibility criteria are lifted, however, the number of constituent changes will be capped at three in the first review.

Upcoming Changes to Chinese Shares in FTSE Russell and Morningstar Indexes

June will be a busy time for the index providers, there are a number of index changes planned by FTSE Russell and Morningstar Indexes* pertaining to Chinese shares.

FTSE Russell:

  • Alibaba (9988), a secondary-listed company listing in Hong Kong since November 2019, will be added into the FTSE China 50 Index, FTSE MPF Index Series and the FTSE Greater China HKD Index in three tranches in June, September and December 2020 at one-third of the weighting at each tranche.
  • In March 2020, FTSE Russell announced to split the third tranche of A-share inclusion into its emerging market indices into two, from the original inclusion proportion of 40% to 10% in March and 30% in June. This will draw a completion of FTSE’s first phase of A-share inclusion with an inclusion factor of 25%. At the same time, FTSE originally planned to implement the final tranche of Saudi Arabia’s inclusion in its Emerging markets indices in March 2020 (25% proportion) was also split into two, with 6.25% and 18.75% in March and June 2020 respectively. Details can be referred to FTSE’s FAQ on the implementation plan for China A-shares and Saudi Arabia, respectively.

Morningstar Indexes:

  • China large- and mid-cap A-shares will be reclassified as emerging markets at an inclusion factor of 25% from June 2020 onwards. Only A-shares trading via the Stock Connect will be eligible for inclusion. Please refer to Morningstar Indexes’ 2019 Market Classification Results for details.

Leveraged/Inversed China A-Shares Products to Come in Hong Kong

On 22 May, the Hong Kong Securities and Futures Commission issued a supplement circular to update the existing Circular on Leveraged and Inverse Products to accept swap-based L&I Products tracking China Mainland equity indices with a leverage factor up to two-times (2x) or negative one-time (-1x). Recall that swap-based and futures-based leveraged/inverse products tracking liquid and broad based Hong Kong and non-Mainland foreign equity indices and case-by-case for non-equity indices with a maximum leverage factor of two times (2x/-2x) were allowed before this supplement circular. The supplemental circular can be found here.

Hong Kong Stamp Duty Exemption for ETF Market Makers Coming in Effect in August and HKEx Reducing Tick Size for ETFs

Recall in February 2020 that the Hong Kong government announced a proposal to waive the stamp duty on stock transfers paid by ETF market makers in the course of creating and redeeming ETF units listed in Hong Kong. The relevant regulations were published in the gazette for negative vetting on 20 May and will take effect on 1 August 2020.

During the month, the Hong Kong Exchange also announced it would reduce the tick size for ETFs. The reduction of tick size depends on the unit price of the ETF. For example, ETFs trading at currency units of 10 to 100 could see their tick size reduced by 50-60%. This could potentially translate to lower spreads for the affected ETFs. Details of can be found on HKEx’s infosheet.

Chinese Equity ETF Watch – HK-Domiciled Onshore Chinese Equity ETFs See USD 0.1 billion Net Outflows; U.S.-Domiciled Chinese Equity ETFs See Larger Outflows

  • Hong Kong-domiciled ETFs in the China Equity Category saw estimated net outflows of USD 25 million in May. The net inflows from the Hang Seng China Enterprises Index ETF (02828), estimated at USD 49 million was offset by the net outflows from the iShares Core MSCI China Index ETF (02801), estimated at USD 83 million. On the other hand, ETFs in the China Equity – A-Shares Category saw estimated outflows of USD 0.1 billion, coming mainly from the CSOP FTSE China A50 ETF (02822/82822) and the ChinaAMC CSI 300 Index ETF (03188/83188).
  • For the first five months of 2020, Hong Kong-domiciled ETFs in the China Equity Category and the China Equity – A-Shares Category saw estimated outflows of USD 0.8 billion and USD 1.5 billion, respectively.
  • In the U.S. in May, Chinese equity ETFs saw larger amount of outflows as compared to the Hong Kong-domiciled ones, estimated USD 1.2 billion from the iShares China Large-Cap ETF (FXI) and the iShares MSCI China ETF (MCHI) and an estimated USD 0.2 billion of net outflows from the Xtrackers Harvest CSI 300 China A ETF (ASHR).

New Launches and Listings

17 ETF New Listings in China

  • Chinese ETF providers listed 17 ETFs on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, including 8 broad market ETFs, 1 sector ETF, 3 thematic ETFs and 2 strategic beta ETFs, 1 bond ETF and 2 gold futures ETFs.   
  • These listings put the total number of ETFs listed in China at 331 (101 ETFs on the SZSE, 230 ETFs on the SSE).

1 ETF New Listings in Hong Kong

  • CSOP listed a leveraged ETF on the Hong Kong Exchange, offering 2x leverage on the NASDAQ-100 Index. 
  • This listing put the total number of ETFs listed in Hong Kong at 205 (131 ETFs, 74 multiple counters, including 25 L&I Products).

3 ETF New Listings in Indonesia

  • Indonesia ETF providers listed 3 ETFs on the Indonesia Stock Exchange, including 1 broad market ETF and 2 ESG ETFs.
  • These listings put the total number of ETFs listed in Indonesia at 43.

6 ETF New Listings in South Korea

  • South Korean ETF providers listed 6 ETFs on the Korea Exchange, including 1 broad Market ETF, 2 sector ETFs, 1 thematic ETF and 2 fixed income ETFs.
  • These listings put the total number of ETFs listed in South Korea at 448.

ETFs Launched in May 2020 in the Asia ex-Japan Region  

About Author Jackie Choy, CFA

Jackie Choy, CFA  

Jackie Choy, CFA is the Director of ETF Research for Morningstar Investment Management Asia