China’s ETF Industry: Short History With Rapid Growth

[Editor’s note: This is the second article in a series of Chinese ETFs in the U.S. Today’s focuses on ETFs listed in China. Read the first installment here: “Chinese ETFs; All Things Considered.”]

The Chinese asset management industry is short on history, yet rapid on growth. Mutual funds first came to market in the late 1990s, and stayed muted until last few years. The industry has broken through $1 trillion (U.S. dollars) earlier this year, as many top asset management firms pushed new products to the market, including ETFs.

The ETFs products are still in their early stage of growth, with just over $24 billion in assets under management (AUM), as of October 2016, tracking primarily Chinese A-shares indexes. However, ETFs are gaining traction quickly.

The top ETF products in China already rival the sizes of the largest Chinese-focused ETFs listed in this country. Similar to the U.S., there is a great concentration of assets among the top products. Of the 91 listed ETFs, the top 10 products gathered more than $20 billion, or nearly 88% of all the assets.

Top Players

The Beijing-based China Asset Management (AMC), one of the largest and most seasoned asset managers, is the provider of the No. 1 ETF in China, the China 50 ETF. This ETF is close to $4 billion in AUM, comparable to the size of iShares China Large-Cap ETF (FXI), the largest Chinese ETF listed in the U.S.

China 50 ETF tracks the SSE 50 Index, an index less known in the international market, representing a full picture of high-quality firms traded on the Shanghai Stock Exchange. Other top ETF issuers include some of the largest asset managers in China, such as Huatai, China Southern, Huaan, Harvest and E-Fund. 

International providers are also entering the Chinese market, mostly through a joint venture structure. For example, PineBridge, Investco, Credit Suisse, Allianz, to name a few, have made their presence known. So far, PineBridge seems to be the most successful international firm. One of its joint venture products with Huatai, the CSI 300 ETF, has become one of the top two largest ETFs in China. They also have lined up differentiating products.

Indexes & Exposures

Nearly all top products track the most popular A-share indexes, such as the China 50, CSI 300, CSI 500. Among the seven ETFs that exceeded $1 billion in assets, six of them track domestic A-share indexes. E-Fund has introduced different products. The Hang Seng China Enterprise ETF tracks Hong Kong-listed H-shares, and it has become one of the top seven ETFs, amassing over $1 billion asset.

There have been plenty of offerings on sector ETFs. However, most have yet to gather sizable assets. There is one exception: The technology-heavy E-Fund ChiNext ETF has become one of the top 10 largest ETFs in China.

Sector Concentration & Product Differentiation

The top ETFs tend to have heavy concentration on the traditionally heavily regulated financial and insurance industries. There are, however, two exceptions among the top 10 products. The China CSI 500 ETF tracks more companies, and thus provides diverse sector exposures. The E Fund’s ChiNext ETF tracks technology, and to a lesser degree, industrial firms.

It is worth noting that a few issuers have introduced factor-based and equal-weighted smart-beta products, such as the YinHua SSE 50 Equal Weighted ETF, the SSE 180 Value ETF and the Huatai-PineBridge SSE Dividend ETF.

There is even a socially responsible themed ETF, the CCB Social Responsibility ETF. However, the concept of social responsibility seems to deviate from the traditional definition of socially responsible in the West. This ETF has plenty of firms that may not be so environmental friendly, such as railroad, car manufacturers, construction firms and utility companies.

The fund probably should have been named the Public Goods ETF, as these firms seem to be the key players in building public infrastructure rather than focusing on environmental protection, socially progressive and good governance policies.

Fixed Income & Commodities

There are currently only four fixed-income funds and four commodity funds listed in China. The Chinese fixed-income market still offers some of the highest yield among major economies. Some Chinese investors have started realizing the benefit of including fixed income as part of their more volatile equity-centric investment portfolios. It is conceivable there may be more room for growth in fixed income.

It is interesting to note that all four commodity products are gold ETFs.

International Exposure

There are very few ETFs providing international exposure outside China. Boresa’s S&P500 ETF was launched in 2013, and it has only attracted $30 million in assets, while Guotai’s QQQ ETF has about $11 million.

Technology & Growth

Technology is playing an increasingly important role in people lives in China. The success of e-commerce is affecting not only how the Chinese shop but how they invest. Today one could acquire financial products with the same ease as one would order a pair of jeans online or on their smartphones.

Alibaba and social media giant Tencent’s WeChat have become important direct distribution outlets to investors. In a span of just nine months, Alibaba has gathered more than $80 billion in Yu’e Bao, a money market fund managed by a third party. The long-standing asset managers also invest heavily in technology.

For example, China AMC recently launched a program selling mutual funds on the most popular social network app—WeChat. With a short history, the Chinese asset managers might be at the forefront of a global trend—redefining investor connectivity by forging relationships with technology giants, reaching investors in a direct way never seen before, propelling the growth of the asset management industry, including that of ETFs.

China-Listed Chinese Equity ETFs