The UK and China plan to increase financial flows between their capital markets with a series of initiatives that could include the establishment of new connecting schemes for ETFs and wealth management between the two countries.
The proposals for a new ETF connect scheme form just one a part of a major new push by the UK government to reset relations with China following years of disagreements and tensions between Beijing and London under the previous Conservative government administration.
The UK chancellor Rachel Reeves said the UK wanted a “platform for respectful and consistent future relations with China” during a visit to Beijing last week where agreements worth up to £600m over the next five years were announced.
“The agreements that we have reached show that pragmatic co-operation between the world’s largest economies can deliver economic growth for the benefit of working people,” said Reeves.
She added it is “crucial” for the UK and China to work closer together on regulatory co-operation as the financial relationship strengthened between the two countries.
“Across capital markets, we have opportunities to deepen connections between the UK and China,” Reeves said. “However, as we continue to strengthen our financial relationship, it is crucial that we work together even closer on regulatory co-operation,” she added.
Representatives from London Stock Exchange Group, Abrdn, Fidelity, HSBC, Prudential, Schroders and Standard Chartered accompanied British officials on the visit during which the chancellor described London as a “natural home” for capital raising by Chinese financial services companies.
The two governments have agreed to work on a study to assess the feasibility of setting up an UK-China ETF Connect scheme which would help to co-operation between their capital markets. No date was given for when such a scheme might be established.
Both governments welcomed the establishment of a joint taskforce between FTSE Russell, Shanghai Stock Exchange and Shenzhen Stock Exchange aimed at improving the attractiveness of China’s capital markets to international investors.
Both sides also welcomed the increased number of UK subsidiaries of Chinese asset managers listing ETFs in London, including those dominated in renminbi.
A UK-China ETF Connect Scheme is an idea that has been discussed previously and some market participants believe that it will be an uphill battle to make it work.
Adrian Whelan, global head of market intelligence for investor services at Brown Brothers Harriman, said the proposals “sound great in theory but less so in practice and in fact could be a non-starter.”
“There are significant logistical hurdles that need to be overcome given the differences in opening hours between London and Shanghai which present real operational challenges for any trading counterparties,” said Whelan.
Another consideration is it is the domicile of the fund, not the exchange listing, that matter most for cross border fund regulatory cooperation or mutual recognition arrangements.
ETFs bought by UK-based investors are listed on the London Stock Exchange but domiciled either in Ireland or Luxembourg and they also operate under the pan-European UCITS regime. Only one ETF to date has been domiciled in the UK – the Commerzbank CCBI RQFII Money Market UCITS ETF – launched by a partnership between the China Construction Bank, Euroclear and Commerzbank in 2015.
“It is far from clear whether regulators Ireland, Luxembourg or the EU will be keen to see ETFs under their supervision involved in this scheme. Basically, it is not within the UK government or regulator’s sphere of control to implement a mutual recognition ETF regime with China given they are largely not UK domiciled funds,” Whelan added.
Another market participant who declined to be named said that any US asset manager running a global investment strategy wrapped in a European domiciled ETF would be wary about their involvement in a UK-China scheme given the growing criticisms that members of the US Congress have been making about US investment flows going into companies with links to the Chinese military.
China has been expanding its mutual market access programme across a number of countries since 2014 when the first of these arrangements – the Shanghai-Hong Kong Stock Connect scheme – was established. That was followed in 2016 by the Shenzhen-Hong Kong leg of the stock connect mechanism and then similar arrangements between China and Hong Kong arrived for bonds in 2017 and wealth management in 2021.
Singapore and the Shenzhen Stock Exchange established an ETF Connect scheme in 2023 and China is also reportedly looking at talks with Saudi Arabia to establish an ETF cross-listing scheme.
Only very limited trading activity has been reported for the early stages of the various stock and ETF connect schemes, suggesting that the proposed UK China ETF Connect scheme could also struggle to attract significant interest from investors.
