Are China’s ETFs taking off?

The AUM of all ETFs domiciled in China was $37.39bn at the end of June, according to data from Morningstar.

China’s ETF market is now the second largest in Asia by assets behind Japan’s, which has $309bn in ETF assets. Japan’s ETFs have been given a boost by the Bank of Japan, which has been buying them as part of its quantitative easing policy since 2010.

Asia’s major ETF markets

Estimated net flows into China’s ETFs in the first half of 2018 were also the second largest in the region after Japan.

While there are a few fixed income and commodity ETFs among the 157 products listed in China, according to Morningstar, the majority of them invest in domestic equities and these have attracted the most new money.

The China Southern CSI 500 Index ETF, the E-Fund Chinext ETF and the Huaan Chinext 50 ETF were the top three asset gatherers in the first half of 2018.

Jackie Choy, director of ETF research for Asia at Morningstar, noted that it is too early to conclude that this is a take-off point for China’s ETFs. He also noted that the ETF inflows represent a broader trend of buying small cap, innovative technology stocks, which dominate the Shenzhen-based Chinext market.

Additionally, there are seven QDII ETFs listed in China, which take advantage of the qualified domestic institutional investor scheme to invest in offshore securities. Their aggregate AUM of $2.34bn accounts for 6.3% of the market share. In the first six months of 2018, they attracted $832.9m, or 12% of net new flows.

Assets in ETFs

Data: Morningstar, in US dollars, as of 30 June 2018.  Locally-domiciled ETFs only. Japan has been excluded for clarity of presentation.

Decline of Hong Kong ETFs

In the meantime, the decline in the AUM of ETFs listed in Hong Kong has been the highest among the region’s markets. Since the peak of $41.32bn in January 2018, they lost in aggregate $6.87bn, or almost 17% of their assets. Around one-third of the loss was due to net outflows from the products.

“The key reason for a fall in AUM of Hong Kong ETFs is the introduction of Stock Connect and thus there being less need for the use of the ETFs investing in China A-shares through RQFII, as institutional investors are now able to buy these stocks directly,” Stewart Aldcroft, chairman of Cititrust, told FSA in May.

His view is supported by the fact that the iShares FTSE A50 China ETF and the CSOP FTSE A50 China ETF were two of the the three Hong Kong-domiciled ETFs with the highest net outflows in the first half of 2018. Both facilitate investment in China A-shares. The third was the Hang Seng China Enterprises ETF, which invests in H-shares (listed in Hong Kong) of mainland companies.

In addition, Mohamed M’Rabti, head of ETFs at settlement firm Euroclear, told FSA previously that the Hong Kong market lacks diversity and only a few products benefit from scale. This has been further exacerbated by product delisting, mostly due to failure to gather satisfactory assets. In Hong Kong, about 35 ETFs were delisted in 2017 and 26 in 2016.

Estimated net flows into ETFs

Data: Morningstar, in US dollars, as of 30 June 2018. Locally-domiciled ETFs only. Japan has been excluded for clarity of presentation.