Chinese ETF Market Poised for Growth
China Post Global has become the first Hong Kong-based asset manager to acquire a European Ucits exchange-traded fund umbrella and its investment management team in the expectation of Chinese institutions increasing their use of ETFs.
China Post Global is a joint venture established last year as the international asset management arm of China Post Fund, one of China’s largest state-owned enterprises. This month China Post Global acquired the Market Access ETF range from the Royal Bank of Scotland, the bailed-out UK bank, and said it is the first time that a Hong Kong asset manager has acquired a European Ucits ETF umbrella. The Chinese company then recruited the former RBS investment management team responsible for the Market Access ETF range.
Danny Dolan, managing director of China Post Global (UK), told Markets Media: “There were a number of interested parties looking to acquire the Market Access ETF range. We decided to keep the brand name which is well-known, particularly for commodities, frontier and emerging markets.”
The 10 Market Access ETFs have assets under management of more than €360m ($410m), track records ranging from five to 10 years and are listed in Frankfurt and Zurich. They will now be cross-listed in Hong Kong.
Dolan said: “We can grow to a great degree and are looking to at least double our assets by the end of this year. The beauty of Market Access ETFs is that we can offer the gold standard of Ucits regulation to Chinese investors.”
He added that China Post Global will seed the smaller ETF funds so they have at least $50m in assets in order to attract Chinese institutions as the joint venture’s parent companies have large numbers of Chinese institutional clients. China Post Global is a joint venture between China Post Group, Capital Securities, a Chinese state-owned enterprise and Japan’s Sumitomo Mitsui Banking Corporation and has two principal shareholders: China Post Fund and RQSI Limited, a US SEC-registered hedge fund.
“We have also hired new heads of distribution in Europe and Hong Kong as the ETFs were not actively marketed for several years,” said Zolan. “They will open doors that have been closed for a long time.”
The annual management fees on the existing ETFs will stay at between 50 and 70 basis points, but improved terms have been secured on the underlying derivative contracts that will cut the overall cost to investors by up to 40 basis points per annum. China Post Global said it has secured new authorised participants and market makers to increase the ETFs’ liquidity.
Larger rival ETF issuers have already launched funds based on Chinese domestic shares but Dolan said China Post Global will compete through innovation.
“Existing ETFs in Europe and the US already provide access to China A shares and we will not be trying to duplicate these products,” Dolan said. “We are aiming to launch smart beta products on Chinese securities in late Q2 or early Q3, which has not been done yet in Europe.”
For example, this week Deutsche Asset Management has listed the db x-trackers Harvest FTSE China A-H 50 Index Ucits ETF, managed by Harvest Global Investments Limited on the London Stock Exchange and Deutsche Börse. The fund tracks the new FTSE China A-H 50 Index, which aims to capture price differentials between China’s domestic A-shares (listed on either the Shanghai or Shenzhen stock exchanges in Chinese Yuan) and the same companies’ share classes listed as H-shares on the Hong Kong market which are traded in Hong Kong dollars.
The new index is the first FTSE Russell index to represent the largest A Share and/or H Shares for Chinese incorporated companies. There are no restrictions on who can trade H shares but A shares can only be traded by residents of the People’s Republic of China or by overseas investors under the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes. H-shares on dual-listed stocks currently trade at a discount to their A-share equivalent which may be due to capital control measures in the Chinese onshore market, and differences in the investor base.
Marco Montanari, Deutsche Asset Management’s head of Passive Asset Management, Asia-Pacific, said in a statement: “This is the first ETF of its kind listed in Europe. In the long run the price differential may close as China’s capital markets open up, but in the meantime our new ETF is a straight forward way for investors to maintain exposure to the ‘cheaper’ share class of dual-listed companies on an ongoing basis. And if the gap does close over time then those investors that have automatically had ongoing exposure to the lower-priced share classes will benefit.”
Mark Makepeace, chief executive of FTSE Russell said in a statement: “As the Chinese domestic market opens, we continue to develop products that provide investors with a variety of tools to capture different aspects of the market.”
China A-shares are not currently included in FTSE’s standard global benchmarks although the region has been on FTSE’s Watch List since 2005.
Dolan said China Post Fund is positioning itself for when China gets a larger weighting in global indices, in accordance with its share of global markets, which is likely to lead to large fund inflows.
“A big factor in our favour is the predicted large inflow of assets into China once markets have opened up,” Dolan added. “China has a low weighting in global indices, 2.5% in MSCI World, versus an estimate of between 12% and 17% once markets are further reformed which will lead to inflows of trillions of dollars. It is not a question of if but when.”
Dolan said the Chinese domestic ETF industry is in its infancy but could see similar growth as the European ETF industry.
“There are grounds for optimism as China can look at the huge success of ETFs in other regions and countries,” he added. “China Post Fund, our parent company, was the first listed fund management company in China and we are well positioned for the growth in use of ETFs by Chinese institutional investors.”
In the first two months of 2016 ETFs/ETPs listed in Asia Pacific ex Japan gathered a record level of $6.41bn according to consultancy ETFGI. The Asia Pacific ex Japan ETF industry had 817 ETFs/ETPs, with 960 listings in 14 countries and assets of $108bn at the end of last month.
Samsung AM gathered the largest net ETF/ETP inflows in the first two months of this year with $1.08bn, followed by E Fund Mgt with $775m and Yuanta with $744m of net inflows according to ETFGI.
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