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HONG KONG: Recent moves by regulatory authorities of Hong Kong, Taiwan and the mainland to facilitate cross-listing of exchange-traded funds (ETF) in the three markets have brought financial integration in Greater China a big step forward, but there remains a long way to go before we see a true common capital market emerge.

The idea of creating a Greater China common capital market has been widely talked about in the past, but it has remained largely academic, due mainly to regulatory and political obstacles - particularly in the case of cross-Straits financial integration.

Signs, however, have indicated that the obstacles are gradually being removed with the cross-listing of ETFs between Hong Kong and Taiwan being the latest breakthrough in the financial integration process.

Last week, three Hong Kong-listed ETFs successfully cross-listed in Taiwan, while one Taiwan ETF cross-listed in Hong Kong after regulators from both sides signed in May a supplementary document to a bilateral Memorandum of Understanding (MOU) on financial co-operation cosigned back in 1996.

The move is more significant than it appears, when one considers the fact that two of the cross-listed Hong Kong ETFs, the CSI 300 ETF and the Hang Seng H-Share ETF, are structured on stock portfolios of mainland firms.

The CSI 300 ETF tracks the performance of equities traded on the Shanghai and Shenzhen exchanges while the Hang Seng H-Share ETF tracks that of Hong Kong-listed mainland firms.

That means individual Taiwanese investors now have a more direct way to invest in mainland firms other than the qualified foreign institutional investor scheme (QFII).

In effect, the ETF trading platform provides a channel through which capital flows across the Straits.

"This is not only an important step in the financial co-operation between Hong Kong and Taiwan, but also signifies an interconnection of the three financial markets via Hong Kong," Alexa Lam, deputy chief executive officer of Hong Kong Securities and Futures Commission (SFC), said in the listing ceremony for the Hong Kong ETFs in Taiwan.

Market watchers agreed that the ETF cross-listing mechanism has effectively pushed financial integration in Greater China a step forward.

"It has had such an effect, although this might not be the intended purpose," said Daniel Chan, senior investment strategist at DBS Bank.

Market participants expect to see further financial co-operation among the three markets in the future.

"This is the first step...we need to start somewhere," said Dr Tang Hing-sing, investment director at BOCI-Prudential Asset Management, which - in cooperation with Taiwan's Polaris International Securities Investment Trust Co - facilitated the cross-listing of the CSI 300 ETF in Taiwan through a feeder fund.

This was definitely a "breakthrough" in the area of financial cooperation among the three markets, added Tang, noting that it took them two years and "a lot of efforts" to get the CSI 300 ETF cross-listed in Taiwan.

Polaris also successfully had its Taiwan 50 Index ETF cross-listed in Hong Kong last week, allowing Hong Kong investors to invest in Taiwan stocks in a more handy way.

In a related development, the effort to introduce Hong Kong-linked ETFs to Shanghai also gained momentum and has entered the final stage.

Chan Ka-keung, Hong Kong's Secretary for Financial Services and the Treasury, told reporters earlier this month during his visit to Shanghai that relevant agencies from both cities have reached a consensus on the offering of Hong Kong-linked ETFs in Shanghai.

He did not indicate a time frame. But Permanent Secretary for Financial Services and the Treasury Au King-chi, who accompanied Chan on the Shanghai trip, told reporters that "everything was ready, except for a go-ahead signal from the central government".

Meanwhile, the Shanghai and Taiwan stock exchanges are also on course to facilitate the cross-listing of ETFs in the two bourses.

The Shanghai Stock Exchange will work closer with the Taiwan Stock Exchange and promote the cross-listing of financial products including ETFs, Liu Xiaodong, executive vice president of the Shanghai Stock Exchange told media during a financial forum in Shanghai in May.

Schive Chi, chairman of the Taiwan Stock Exchange, confirmed the effort in the same occasion by saying that the listing of Taiwan ETFs in Shanghai would provide mainland investors a channel for investing in Taiwan stocks other than the mainland's Qualified Domestic Institutional Investor scheme.

However, talks between the bourses seem to have been hindered by the absence of an agreement on financial supervision cooperation between Taiwan and the mainland.

Liu said in May that cooperation between the Shanghai and Taiwan bourses would hinge on the signing of a memorandum of understanding (MOU) on financial supervision co-operation between the two sides.

Such a document is expected to provide a framework for regulators from both sides to coordinate their efforts in supervising cross-border financial activities.

It's anybody's guess when the two sides will sign an MOU. But Sean Chen, chairman of Taiwan's Financial Supervisory Committee, said in June that it was conceivable that the two sides could sign an MOU "this month or next".

In any event, Taiwan-linked ETFs will ultimately make their way to Shanghai and vice versa, although it will unlikely happen this year, BOCI-Prudential's Tang said.

"It will be a great achievement if the plan can materialize by the second half of 2010," Tang said.

(HK Edition 08/29/2009 page2)