A move by China’s securities regulator to set up a separate channel to approve equity index fund products is expected to encourage a flood of applications for exchange traded funds (ETFs) this year.

The China Securities Regulatory Commission (CSRC) sent a supplementary notice to asset managers and fund custodians recently proposing the creation of a channel for passive equity index products.

This would be separate to approval channels that already exist for equity funds, fixed income funds, qualified domestic institutional investor (QDII) funds and segregated account products.

If the new measure is introduced – and no date has yet been set – fund management companies would be able to submit applications simultaneously for both equity index funds and actively managed equity funds.

“By separating index funds from the channel for equity funds, the approval process will be faster and smoother,” notes Liu Zhaoyang, fund analyst at Howbuy.

He believes such a measure would open the gate for a flood of diversified ETF products to come to market this year.

Supporting this view, a senior manager in charge of ETF and quantitative business at Boresa Asset, who preferred not to be named, sees the measure as a sign that the CSRC is eager for FMCs to issue more passive index products, supporting the development of ETF products in China.

Even before this new measure was proposed, 2011 was being tipped as an exciting year for index funds in China. There were 13 equity index funds queuing for CSRC approval by the middle of this month.

Equity index fund products started gaining in popularity with Chinese investors in 2009, when four ETFs were launched. The following year saw 11 more ETFs, and now there are a total of 22 ETF products of various styles in China. Those that are in the pipeline will only add to what is a diversified index landscape already.

Some will track specific sectors, such as Guotai FMC’s SSE (Shanghai Stock Exchange) 180 Financial ETF and China Merchant Fund’s SZSE (Shenzhen Stock Exchange) TMT 50 index fund.

Others adopt a more innovative structure. UBS SDIC, for instance, is applying to launch a listed open-ended fund tracking the CSI Upstream Resources Industry Index.

Index products typically render good returns in an upward market. But the need for passive investors to have a well-thought-out allocation strategy becomes key in a balanced or volatile market. “If you think a certain kind of stock, say large caps, will outperform, you can allocate assets into ETFs tracking large caps to generate alpha,” suggests the Boresa manager.