Greater China is now a ‘growth engine’ for Asia ETFs, BBH says #NewsMarket

Greater China is emerging as the powerhouse of exchange traded fund growth in Asia Pacific, with investor demand predicted to continue to expand strongly over the next 12 months, a new report suggests.

Greater China, defined as Hong Kong, Taiwan and mainland China, is currently the fastest-growing ETF market in the Asia-Pacific region. For the first half of this year, the three greater China markets have accounted for $102bn of net flows, representing 70 per cent of all net new flows in Asia-Pacific including Japan, according to the Brown Brothers Harriman report.

Combined ETF assets of $557bn in greater China now account for 38 per cent of total Asia-Pacific ETF assets of $1.49tn, the latest BBH Greater China ETF Investor Survey finds.

ETF adoption among institutional investors in Greater China is also likely to accelerate, the survey shows.

This article was previously published by Ignites Asia, a title owned by the FT Group.

A total of 77 per cent of BBH’s respondents surveyed this year expected to increase their use of ETFs in the next 12 months. Taiwan-based respondents showed the strongest interest at 87 per cent, followed by mainland Chinese investors at 77 per cent and Hong Kong investors at 69 per cent.

The BBH report surveyed 103 institutional investors based in Greater China, with 59 per cent of respondents managing more than $1bn in assets.

Of the respondents, 39 per cent reported allocating more than 50 per cent of their portfolios to ETFs, compared with 24 per cent of respondents globally.

Chris Pigott, head of Asia ETF services at Brown Brothers Harriman, said that Greater China was becoming the “growth engine” of the Asia-Pacific region in terms of ETF asset growth, although the three markets came with nuances in terms of growth drivers.

He noted that while Taiwan and Hong Kong were seeing retail ETF investment expand, growth in China’s onshore ETF market has been driven by state-backed organisations.

“China onshore CSI 300 broad-based equities products have been attracting the most inflows this year, which is quite an interesting dynamic, given the volatility that has persisted in the onshore equities market,” he said.

“We have still seen substantial inflows coming from state-backed organisations into the ETF market. With that said, I think the China onshore ETF market has been growing rapidly, even pre this kind of intervention initiative that has been happening,” he added.

A majority of institutional investors across Greater China also plan to expand the number of ETF providers they use.

This proportion is largest in Taiwan where 70 per cent of investors said they would work with more ETF issuers next year, while in Hong Kong 63 per cent of respondents said they would work with more ETF firms, and in mainland China this number was 58 per cent.

Increased investor demand for portfolio diversification is also helping to propel the growth of ETF platforms to include active, thematic, multi-asset and defined outcome ETF strategies across the Greater China region.

Pigott noted that demand from Chinese investors for outbound investment remained strong, and there had been an “increasing allocation from Chinese onshore organisations” investing offshore through the qualified domestic institutional investor scheme into ETFs, which offer a broader range of products compared with ETF Connect.

While the availability of ETFs through the Hong Kong-China Stock Connect has boosted cross-border demand in China, investors still prefer domestic QDII (Qualified Domestic Institutional Investor) funds over ETF Connect.

A total of 56 per cent of mainland Chinese respondents to the BBH survey already buy ETFs through the QDII scheme but only 22 per cent were doing so through ETF Connect.

Chinese onshore regulators are pushing assets into ETFs and QDII is no different, with the majority of new QDII public funds structured as ETFs, it added.

Compared with the $1bn invested by Chinese investors through ETF Connect in the first six months of this year, Hong Kong investors have not been as interested in the China-listed ETFs available through the scheme.

The BBH report showed that 66 per cent of respondents planned to increase exposure to actively managed ETFs over the next year, while 45 per cent cited index mutual funds as a top source from which they would reallocate capital to purchase active ETFs.

However, Pigott argued that a substantial shift from mutual funds into active ETFs would not happen as distribution channels remained a “fundamental challenge” for ETF issuers.

“Distribution channels and how it’s set up is still a very fundamental challenge that ETF issuers face,” he explained. “Traditional channels are very dominated by trailer-drive distribution and retrocessions.”

“I think we are probably not going to see a substantial shift from mutual funds to active ETFs until we see some reform related to some of the distribution channels,” he added.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.