Anthony Kwan | Bloomberg | Getty Images BEIJING — China has joined the global craze for exchange-traded funds, the investment product that allows traders to buy and sell a basket of stocks. Better known as ETFs, the funds surged in popularity in the US after the financial crisis and spawned $3 trillion businesses such as BlackRock’s iShares ETF brand. In mainland China, ETFs have proliferated faster than the stock market. In five years, the number of ETFs more than quadrupled to 645, while the number of stocks increased by just 53% to 4,615. That’s according to official data and a report from Hong Kong Exchanges and Clearing, which also said the mainland’s ETF market has become a 1.4 trillion yuan ($209 billion) business, more than tripling in just five years. A regulatory change that took effect Monday opened up that ETF market to foreign investors through Hong Kong — a program called ETF Connect. Beijing-based ChinaAMC, which said it launched the first ETF on the mainland in 2004, has been riding the industry wave and manages 10 of the funds eligible for trading under the new cross-border trading program. These include ETF tracking indices and topics such as semiconductor growth. ETF Connect is heavily skewed towards the mainland. Of the initial batch of eligible ETFs, 83 are listed on the mainland, compared to just four in Hong Kong. Goldman Sachs predicts $80 billion more mainland asset purchases than those in Hong Kong over the next 10 years. “Adding Northbound ETFs to one’s A-share portfolio could potentially expand the yield frontier and improve risk/reward,” Goldman Sachs analysts wrote in a report this week. “While the initial qualifying universe for Southbound appears narrow, the underlying assets still provide Mainland investors with broad exposure to HK-listed Internet and Financial stocks.” Chinese internet tech giants such as Tencent and Alibaba have listings in Hong Kong but not on the mainland. On the other hand, many China-focused companies are only listed on the mainland. One of the things ETF Connect can do is to enhance international investors’ understanding of mainland China ETFs and increase the influence of the products, Xu Meng, ChinaAMC fund manager, said in a statement. Xu is also executive general manager of the firm’s quantitative investment division. ChinaAMC claims that as of the end of 2021, it had more than 300 billion yuan in passively managed assets.

On the same day that ETF Connect was launched, Chinese regulators announced a new program – to take effect in about six months – that would allow investments in financial derivatives on the mainland via Hong Kong. A next phase of the program is to allow mainland investors to trade financial derivatives in Hong Kong. These moves to connect the Hong Kong and mainland markets follow similar programs for stocks and bonds that began in 2014. Mainland China is home to the world’s second-largest stock exchange by value.

More ETFs are coming

Other financial firms are entering the ETF market — with an emphasis on larger Chinese clients who want to invest internationally through Hong Kong. Wealth manager Hywin Holdings, based in Shanghai with a subsidiary in Hong Kong, last week launched a stock market health index with FactSet, a financial data and software company. The 40-stock “FactSet Hywin Global Health Care Index” tracks stocks of companies primarily listed in Europe or North America — such as AstraZeneca and Merck. The plan is to commercialize this index with an ETF listed in Hong Kong.

Read more about China from CNBC Pro

“Hywin’s customers [more than 130,000 across Asia], more and more, they find the world too fluid, too unstable. They want to take advantage of opportunities, but they are less sure these days about stock and time selection,” said Nick Xiao, vice chairman of Hywin Holdings and CEO of the company’s overseas business, Hywin International. After this first co-branded index, Xiao said he expects more cooperation with FactSet to create indexes and ETFs. He noted that there are already eight ETFs in Hong Kong that track the FactSet indices. Among institutional investors and money managers in greater China, nearly 40 percent said they invested more than half of assets under management in ETFs, far higher than the 19 percent share in the U.S., Brown Brothers Harriman found in an annual survey that published in January.