China’s exchange-traded fund, or ETF, market is undergoing rapid growth with booming product innovation and diversification, and this is a multi-year trend that will present significant opportunities for global ETF managers and service providers, according to New York-based global financial services firm Brown Brothers Harriman.
“The overall maturity of the ETF market here isn’t at the same scale as the more mature markets like Europe and the United States. But the pace (of development) is increasing rapidly,” said Chris Pigott, head of Asia ETF services at Brown Brothers Harriman, which has a global network of fund custodian services covering over 90 markets.
Data compiled by BBH show that aggregate net new inflows into the Chinese mainland, Hong Kong and Taiwan ETF markets in the first eight months of the year stood at $166 billion, accounting for 72 percent of the net new flows into Asia-Pacific listed ETFs.
Of the $166 billion, $119 billion has gone into the Chinese mainland market, over 90 percent of which went into equity-based ETFs.
The strong fund inflows have helped the Chinese mainland ETF market reach 3.5 trillion yuan ($491 billion) in assets as of the end of September, representing about 3.5 percent of the global ETF market, which has eclipsed $14 trillion in asset size, according to BBH.
This proportion is likely to rise in the coming years, Pigott said in an exclusive interview with China Daily.
It will be driven by Chinese institutional investors’ increasing adoption of ETFs, regulatory support to promote the ETF market and burgeoning retail distribution channels, he added.
Wu Qing, chairman of the China Securities Regulatory Commission, said in September that the commission will actively promote the innovation of index products such as broad-based ETFs, and encourage the launch of more ETF products focusing on Shenzhen’s ChiNext and Shanghai’s STAR Market to better serve investors and develop new quality productive forces.
“We expect to see increased utilization of ETFs in the Chinese mainland, be it domestically for inbound strategies, or as part of outbound diversification in terms of portfolio management,” Pigott said.
While it is still early days to forecast how the recent rally in Chinese equities will influence the overall development of China’s ETF market, Pigott said BBH has witnessed renewed global interest in onshore equities and a growing tendency of investors turning to ETFs as a vehicle to participate in the ongoing rally.
The rapid development of China’s ETF market will attract more global ETF issuers, Pigott said, as continued product innovation will bring in more products and strategies, many of which global issuers are experienced in, such as when it comes to actively managed ETFs and ETFs with overseas exposure.
The BBH survey found that 77 percent of mainland respondent institutional investors were planning increased exposure to actively managed ETFs in the next 12 months, while 78 percent have used or plan to use ETFs through the qualified domestic institutional investor, or QDII, scheme to invest in overseas assets. QDII is a quota-based system whereby asset managers raise money at home and allocate it overseas.
“We will continue to see more diversification of the mainland ETF market, not only from a product perspective, but also in terms of the ETF issuers,” Pigott said.
He added that China’s financial opening-up and the growing appetite for overseas assets from domestic investors have also presented BBH with a significant business opportunity as the bank provides global custody capability for domestic banks, who in turn serves the QDII funds.