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Hong Kong’s US$46 Billion ETF Market – Prepare for the Chinese ‘ETF Connect’ Wave

Hong Kong’s US$46 Billion ETF Market – Prepare for the Chinese ‘ETF Connect’ Wave

23 November 2017

The launch of ETF Connect should drive significant monetary flows into HK ETFs from Chinese investors starved of international market exposure, potentially acting as the catalyst for a new era of growth for the Hong Kong ETF market.

The deal, an exclusive cross-border scheme which will enable millions of investors in mainland China to purchase Hong Kong listed ETFs, could spark flows of several billion dollars in the first year alone.

For ETF providers based there, the opportunities are enormous, but the importance of first mover advantage & acquiring key distribution partnerships cannot be understated.

Equally as important in today’s digital world is the ability of ETF providers to integrate the latest technology to enable trading at the touch of a button, and using existing fintech leaders within China could – and almost certainly should – be a key part of any ETF provider’s strategy to crack the market.

Impact of technology key

Aside from Chinese institutional money seeking international exposure, direct to consumer digital distribution offers providers the potential to reach millions of retail investors using mobile & internet technology.

Historically, it was common to spend 70+% of costs to distribute in China but FinTech disruptors like WeChat & Alipay are changing this landscape.

As an example, Alibaba’s Alipay attracted USD$165 billion from over 185 million investors to their Tianhong managed Zenglibao money market fund via its Yu’e Bao service.

Launched 4 years ago, it is now the world’s biggest, with 70% of accounts holding less than 1,000 Yuan (US$145). Partnering quickly with firms like Alipay, Ant Financial, WeChat, East Money, Noah Upright, Lufax, Taobao Fund Online Store, etc to distribute HK ETFs on the Mainland will therefore be key for ETF providers to tap into this increasingly important distribution channel.

Indeed retail investors, empowered by advanced mobile payment technology, are now much more likely to trust their money via digital payment with household technology brand names like Alipay, WeChat and Apple which form part of their everyday lives.

ETF providers in Hong Kong are therefore advised to embrace this paradigm shift and enter Mainland China with strategic FinTech distribution partnerships firmly in place to guarantee success.

The Hong Kong ETF Market

The scale of the opportunity for ETF providers should not be underestimated. Established in 1999, Hong Kong’s US$46 billion ETF market is 2nd only to Japan in the region in terms of market capitalisation.

The average daily turnover (ADT) in August was US$602 million, and the market has grown from US$13 billion spread across 24 products in 2008, to US$46 billion across 157 products from 27 providers (excluding gold ETFs) by 2017.

This is a 250+% rise in market cap and a 554% increase in the number of products available. So far, so good, but the last 4 years have seen market cap growth slow significantly.

Like many global ETF markets, Hong Kong is top heavy, with the majority of the ADT and AUM concentrated around a few top funds.

At US$30.5 billion, the top 5 funds by market cap hold 65% of total AUM. These early entrants to the market capitalised on first mover brand advantage and have retained market leading positions.

Liquidity is even more concentrated. In August 2017 the 5 leading funds, consisting of The Tracker Fund of Hong Kong, Hang Seng H Share, CSOP FTSE China A50, China AMC CSI300 & BlackRock’s iShares FTSE A50 China shared 86% of total ADT.

In comparison, the Mainland China ETF market is comprised of two primary exchanges, the Shanghai Stock Exchange (SSE) & the Shenzhen Stock Exchange (SZSE).

The SSE launched its first ETF, the ‘SSE 50’ in 2005. It now lists 110 ETFs from 26 providers. Total market cap is US$26.3 billion (RMB174.5 billion) excluding monetary funds, with the top 5 funds – consisting of China AMC, Huatai-Pinebridge, China Southern, Huaan & E Fund Management – holding 50% of the total market cap.

The smaller SZSE has 53 LeFu branded products and a market cap of US$6.7 billion (RMB44.5 billion). Its first ETF, the SZSE 100 was launched in 2006, while Harvest, China AMC & E Fund Management are market leaders in Shenzhen.

Current Challenges

While the Hong Kong market has seen a number of milestones since coming to the fore in the 90’s, there remain some hurdles to be overcome.

Regulators could do more to promote growth via a number of further changes to the marketplace

Areas of potential interest could include:

  • Eradicate Non-Transparent Distribution Monopoly. Stop advisors recommending funds who pay them the highest commissions. A fee-based model would incentivise advisors/distributors to purchase/promote lower cost & often better-quality ETF products. The UK, US, Australia, Netherlands, Denmark all operate transparent fee-based models.
  • Cross-Listings/Passporting: Promote further market cross-listing & increase passporting initiatives to broaden investor options.
  • Education: Promote public ETF education. Perhaps provide MPF pension contributors with a 1 month rebate to invest in an ETF, promoting self-education.

Should these challenges be overcome, the ETF market in Hong Kong is sure to thrive, with providers who act with agility and can take advantage of the latest digital trading capabilities, set to benefit the most.

This article originally appeared in Ignites Asia on 15th November 2017. You can view the article here. (Please note that you must be a subscriber to Ignites Asia to view their content).

About the author

Paul Treanor

Paul Treanor

Product Consultant

Based in Hong Kong, Paul Treanor has 10 years experience across fund administration and wealth management systems and operations across EMEA and APAC.

Paul is responsible for developing new fund administration sales opportunities in Hong Kong as well as oversight of Wealth Management user content across the APAC region.