$2bn in outflows for A-share ETFs

Asset Class in Focus

The US-China trade dispute, slowing GDP growth and RMB currency concerns have punished A-share ETFs in the first seven months of the year.

In July, Chinese equity markets edged down as GDP growth slowed to 6.2%, the lowest in almost three decades, partly a result of the ongoing trade dispute.

China A-share ETFs were hit hard, according to a Morningstar report. ETFs in the China equity A-shares category recorded a cumulative $2bn in outflows for the first seven months of 2019.

During the same period, Hong Kong-domiciled ETFs investing in China equities had estimated outflows of $400m, the report said.

But a contradiction exists: The A-share index, the CSI 300, year-to-date, is outperforming the MSCI China, the MSCI World and the MSCI Asia-Pacific ex-Japan indices  (chart below).

FSA asked Morningstar for comment, but the analyst was unavailable.

According to FE data, there are 34 ETFs investing in China equities that are registered for sale in Hong Kong (CSOP and Mirae Asset have the most products for sale). Data also shows that at least 12 of the ETFs track China A-share indices.

Assets in Hong Kong’s ETF industry have grown threefold in the last 10 years, but the market lacks product diversification, according to Mohamed M’Rabti, Brussels-based head of ETFs at settlement firm Euroclear, FSA previously reported.

“Diversity is really lacking in the Hong Kong ETF space,” he said, adding that the market for ETFs is still small and assets have been overly concentrated in just a few products.

In June this year, Harvest Global Investments in Hong Kong, delisted its MSCI China A 50 Index ETF, according to filings from the Hong Kong Exchange.

There will likely be more pressure on mainland equities in the next 8-12 months. The escalation of the trade dispute through additional tariffs announced in August, as well as the falling rate of the RMB versus the US dollar, do not bode well for many of China’s listed companies.

But macroeconomic concerns haven’t prevented firms from launching more China-focused products. In July, eight China-focused ETFs were launched, two in Hong Kong and six in China, according to the Morningstar report.

The CSI 300 vs key indices year-to-date

Source: FE. In US dollars, year-to-08 August 2019

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