Merrill Lynch is set to launch an exchange-traded certificate platform in Asia, starting with products based on four China themes. The new suite of products started trading in Australia on Monday and will be listed in Hong Kong and Singapore within the next two months.

The certificates, which are compiled using Merrill's in-house research, tap into four hot sectors in the Chinese market: water, luxury brands and Chinese stocks listed in Hong Kong and Singapore. The Australian launch also included a hedge fund replication index that is not yet approved for retail investors in the two Asian cities.

The H-share certificates offer investors a familiar play on the cheaper valuations available in Hong Kong. According to Merrill, Hong Kong-listed companies trade at an average discount of about 59% to their A-share counterparts, with some trading at a discount of as much as 400%. The index invests only in these discounted stocks and its biggest holdings are now in China Shipping Development, China Citic Bank and Bank of China.

There is even better value to be had by investing in Chinese companies listed in Singapore, according to Merrill strategists. At the start of February, the average S-share was valued at 13.4 times its 2008 earnings, compared to 14.8 times in Hong Kong and 25.9 times in the A-share market. The quality of S-shares can be patchy, but Merrill says that simulations of its index show considerable out-performance against the Hang Seng H-shares index and the MSCI China Index. The heaviest weighting in the index is in China Fishery Group, Midas and China Milk Products Group.

Overseas Chinese stocks, whether in Hong Kong or Singapore, stand to benefit from the considerable amounts of cash flowing out of China under the qualified domestic institutional investor scheme. Merrill says that more than $20 billion of Chinese funds will be invested in Hong Kong during 2008 and perhaps $2 billion in Singapore's S-shares.

The water and luxury brands certificates give investors 100% exposure to a basket of companies that earn a significant chunk of their revenue in those sectors. In both cases the underlying theme has already proved popular with investors. China faces serious water shortages as its economy continues to grow, which stands to benefit companies involved in supplying water to Chinese cities or which specialise in designing, manufacturing or marketing technologies or products that can help to conserve or purify water supplies. The three biggest holdings in the water index are NWS Holdings, China Everbright International and Hyflux.

The luxury brands index is a straight-forward play on the rise of China's middle class and the so-called Generation Y û those born after the start of reforms in 1978. The biggest stakes in the index are in Gome Electrical, Sohu.com and Tencent.

The certificates charge a 1% index-management fee and all of the stocks picked for inclusion in the indices are subject to liquidity and market capitalisation considerations, and are reviewed quarterly.

Merrill says these four certificates are just a starting point. The hedge fund replication certificates are expected to follow shortly. Globally, Merrill has about 60 proprietary indices so the pipeline of future certificates is rich.