SHANGHAI/HONG KONG, July 4 (Reuters) - Investors in China and Hong Kong started trading exchange-traded funds (ETF) in each other's markets on Monday, but the benefits of the newly-launched ETF Connect are sharply skewed toward Chinese fund managers, fuelling calls to address the imbalance.
Under the cross-border investment scheme, eligible China-listed ETFs far outnumber their Hong Kong-listed peers, and the industry is hoping that regulators will gradually relax rules for Hong Kong funds.
The inclusion of ETFs into mainland-Hong Kong Stock Connect came days after the 25th anniversary of the handover of Hong Kong to Chinese rule, on July 1. The scheme represents China's latest step to open up its capital markets, and promote financial integration.
But with just four Hong Kong-listed ETFs qualified - compared with 83 eligible products traded in Shanghai and Shenzhen - the benefits are sharply skewed toward Chinese fund managers who have so much more product to offer investors.
"During the initial stage, ETFs that invest in China's A shares would benefit more," said Luo Guoqing, head of index investing at GF Fund Management, which runs 12 eligible products.
China's 1 trillion yuan ($149.25 billion) ETF market is much bigger, and more liquid than Hong Kong's, and is much more focused on local markets, giving mainland money managers an edge under current eligibility rules.
As a result, only four Hong Kong-listed ETFs - the Tracker Fund, the HSCEI ETF, the CSOP HS TECH Index ETF and the iShares HS TECH ETF - were included in ETF Connect, which require eligible ETFs to have heavy exposure in locally-listed stocks.
In contrast, 53 Shanghai-listed, and 30 Shenzhen-listed ETFs are included in the scheme.
"The ultimate goal of the ETF connect is really to provide product diversity to both sides of the investors," said Christine Lin, Wealth & Asset Management Sector Leader for EY Hong Kong.
"So if you limit the investment, scope, or the strategies of the ETF, it will be sort of against this main idea of the regulators."
Of the 153 ETFs in Hong Kong, only 21 are focused on local stocks, while others have diverse exposure, including to shares traded in the U.S. and other Asian markets, according to CSOP Asset Management. Most China ETFs are locally-focused.
"The start of the ETF Connect is the first step," said Ivan Shi, head of research at fund consultancy Z-Ben Advisors.
"Once it gains traction among mainland investors, we expect the program to explore its potential by relaxing the rules and including regional and global ETFs listed in HK." ($1 = 6.7000 Chinese yuan renminbi) (Reporting by Samuel Shen in Shanghai and Selena Li in Hong Kong Editing by Shri Navaratnam)
