The plan to introduce a mainland-listed ETF linked to Hong Kong stocks may have triggered heated debate in Hong Kong, but fund managers in China are less excited, noting there is scant demand for passive investment products and what little there might be is declining.
Speaking at the ETF & Indexing Investment Summit Asia 2011 in Hong Kong yesterday, Xu Zhiyan, managing director of passive investment at Hua An Fund Management, pointed out that demand for the prospective ETF is problematic because investor appetite needs time to develop.
China’s vice-premier Li Keqiang unveiled the ETF plan during his visit to Hong Kong last month as part of a broader set of announcements to foster further cross-border investment.
The ETF is seen by Hong Kong investors as a scaled-down version of the experimental “through-train” programme announced in August 2007 to allow mainland investors to buy overseas stocks directly. That programme, which was quickly put on hold, helped to push the Hang Seng Index through the 31,000 point barrier within two months.
Thanks to the efforts of the three stock exchanges, the China Securities Regulatory Commission (CSRC) and fund management firms, ETFs have developed rapidly in China in the last two years. Eleven were listed last year and 11 more are expected to be listed by the end of 2011.
However, Xu points out: “The problem is that the size of ETF funds is getting smaller and smaller.”
Huatai PineBridge, for instance, launched the Shanghai Stock Exchange (SSE) mid-small cap ETF in January. By the end of June, its subscription was only 51 million units. By contrast, Huatai PineBridge’s SSE dividend ETF, launched in 2006, has 945 million units.
Xu notes that by the end of last year, the first five ETFs, launched in 2004 and in 2006, had a combined market share of nearly 90%, of which the first three had almost 80% and still have by far the highest turnover and trading volume. China’s largest ETF, E Fund’s SSE 100 ETF launched in 2006, had subscription of 24.2 billion units by the end of June.
Further, Xu also says that the trading volume of ETFs has gone down this year, although that is mostly due to unfavourable market conditions.
“In China, people want to buy equity and can tolerate high volatility and are less fond of index product with low beta,” Xu says, adding that brokers don’t have enough incentive to sell ETFs. “There are many active equity investors in China, but the number of ETF investors is very limited.”
ETF trading in China is order-driven and trading volume depends on supply and demand. Xu suggests further investor education from fund houses and brokers is needed to cultivate demand.
But China is set to include ETFs as part of its margin trading and securities lending programme, which means investors will be able to short ETFs. Xu suggests that this will help to improve the liquidity of ETF products.