China And Japan Exchanges Officialy Sign ETF Connect Mechanism

China-Japan ETF Connect
An employees of a foreign exchange trading company work next to monitors displaying Japanese yen's exchange rate (Photo: Reuters)

China and Japan have signed a new agreement that would allow each country access to their respective exchange-traded funds (ETFs) in the coming months. The signing of the new China-Japan ETF Connect mechanism has been seen by market experts as a major step forward for both nations in opening up their respective financial markets to investors from both sides.

The new mechanism was signed by the Japan Securities Group and the Shanghai Stock Exchange earlier in the week during the first Sino-Japanese Capital Market Forum in Shanghai. The agreement now allows the cross-listing of various ETF products from both exchanges. Additionally, qualified institutional investors can now set up funds that can be listed in either exchange.

Four Chinese asset management companies have reportedly already filed their applications to start a new ETF that would track Japan's securities indexes. These companies include China Asset Management, Hua An Fund Management, E Fund Management, and China Southern Asset Management.

As of January, there are about 224 ETF products issued in Japan, with 187 of them tracking the Japanese domestic market. Majority of the ETFs issued in the country is held by Japan's central bank. The total value of the issued ETFs in the country is valued at around US$313 billion.  

According to the analysts, the availability of Japanese ETFs should help Chinese investors diversify their risks given that there are a limited amount of products targeting the country's market. Japan's economy has also slightly rebounded, which should bode well for the various ETFs' performance moving forward. Despite the advantages, analysts still warn that there still could be potential risks in investing in the Japanese ETF markets given the central bank's large holdings.

During the signing, the chairman of China's Securities and Regulatory Commission, Yi Huiman, mentioned that the agreement will further boost the country's cross-border public fund product system. The move also helps investors from both countries to have access to any available opportunities found in each other's market.

Both Japan and China have been working towards the finalization of the agreement since October of last year. Both countries' respective markets have been studying the feasibility of cross-listing their ETFs through a new mechanism that would benefit both parties. With the agreement now signed, both countries would still have to implement the move, which may take some time. China and Japan have not yet officially announced the launch date of the cross-listing. Local media reports have speculated that the cross-listing may happen as early as next month if everything goes according to plan.

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