China-Japan ETF connectivity: another meaningful step for the opening-up of the China market

By: Lisa Yingying Li, Head, Overseas Institutional Investor Services, Global Business Development, Shanghai Stock Exchange (SSE) Aug 2019

On 25 June 2019, the Shanghai Stock Exchange (SSE) and the Japan Exchange Group (JPX) held ceremonies to officially launch China-Japan ETF Connectivity, a scheme for creating ETFs that link the ETF markets of the two bourses, while increasing opportunities for cross-border investments between China and Japan.

Eight months of hard work has now come to fruition. On the SSE market, there is one TOPIX ETF developed by China Southern Asset Management, and three ETFs tracking Nikkei225 managed by HuaAn Fund Management, China Asset Management, and E Fund Management respectively. On the TSE market, the four ETFs are: NEXT FUNDS China AMC SSE50 ETF, Listed Index Fund China A-Share (Panda) E Fund CSI300, MAXIS HuaAn China Equity (SSE 180 index) ETF, and One ETF Southern China A-Share CSI 500.

In recent years, the SSE has made vigorous efforts to globalise its market, to provide convenient access channels for investors to diversify their asset allocation, and to facilitate capital market opening up of China. In November 2014, the SSE enacted Shanghai-Hong Kong Stock Connect, a link to trade eligible stocks from the SSE and the HKEX. In June 2019, the SSE unveiled Shanghai-London Stock Connect, a listing connect with the LSE based on depository receipts. The launch of China-Japan ETF Connectivity is another significant step to implement China’s market opening-up policy and to offer another destination for outbound investment.


In October 2018, the SSE signed a memorandum with JPX to strengthen the cooperative relationship for discussions and promotional activities for creating the China-Japan ETF Connectivity Scheme, against the backdrop of the regulators’ advocacy for capital market cooperation between China and Japan. During the China-Japan Capital Markets Forum held on 22 April 2019, the SSE and the JPX signed an agreement, aiming to launch the Connectivity Scheme.

What is China-Japan ETF Connectivity

The framework of China-Japan ETF Connectivity was co-developed by the SSE and JPX after a close study of the two markets’ features, and a comprehensive understanding of the cross-border investment demands.

Under the scheme, a Chinese ETF provider with QDII quota will be able to develop a feeder ETF that invests more than 90% of its assets in a TSE-listed ETF, and a Japanese ETF provider with QFII/RQFII quota will be able to develop a feeder ETF that invests more than 90% of its assets in an SSE-listed ETF.

This scheme establishes a convenient connection between the two markets and promotes mutually-beneficial cooperation for the interested parties, based on the partnership between the two exchanges.

Features and significance

1. The China-Japan ETF Connectivity scheme is a comprehensive and multi-layered connectivity mechanism for both capital markets

The scheme takes into account the comparative advantages of the SSE and JPX, and embodies the principle of win-win collaboration for the stakeholders, including asset management companies, index providers, and custodian banks.

Under this scheme, asset management companies from both China and Japan assist each other in understanding about and investing in the other capital market. Index providers from the two countries arrange for mutually-beneficial licensing terms to asset management companies, with goodwill to minimise investment costs. The custodian banks of the two sides also join hands to offer services to foreign and domestic funds.

2. The China-Japan ETF Connectivity scheme is line with the current cross-border investment mechanism in both countries

Operation-wise, the feeder ETFs listed on the SSE and JPX adopt conventional cross-border ETF mechanisms. Given the one-hour time difference, home market rules will be followed in fund raising, investment operation, listing and trading, subscription and redemption, as well as in clearing and settlement. Cross-border capital flows will be managed through the QDII and QFII/RQFII mechanisms.

In the case of Eastbound investment (from China to Japan), a Chinese asset manager raises funds from the public and sets up an ETF under the approval of the CSRC and of the SSE, then invests into a TSE-listed ETF by means of subscription/redemption in the primary market and trading in the secondary market. The Westbound investment (from Japan to China) follows similar arrangements.

3. The China-Japan ETF Connectivity scheme offers a new model of inter-exchange collaboration and cross-border investment

Unlike the Shanghai-Hong Kong Stock Connect, local investors enjoy the convenience of investing in ETFs listed on the home exchange at much lower costs following the home exchange rules. In addition, participants to the Connectivity from both countries can continue with their current system configurations to offer new products. This new scheme provides much convenience for cross-border capital flow supervision, offers opportunities of direct partnership between asset managers from both countries, and creates an integrated business eco-system.

Looking ahead

As a major type of exchange-traded products, ETFs are well accepted and highly recognised by global investors. They are the preferred choice for investors to carry out passive investment. This model of ETF connectivity is fully scalable in that other types of ETF products and additional asset classes could be added as deemed appropriate. Given the sizes of the two markets, this may be a small step, but is a meaningful step with big potential. The SSE is willing to explore the possibility of using the ETF connectivity with other markets.