China’s ETF Home Field Advantage Gives Local Firms a Leg Up

  • ETFs from local providers only ones growing in asssets in ’16
  • Growth comes despite foreign firms offering cheaper products

Call it China’s financial home game.

Of the 44 Hong Kong exchange-traded funds that invest in mainland Chinese stocks, only three have posted inflows this year as traders pulled a total of about $1 billion from the group as a whole. The three winners had one thing in common: They were locally owned.

Investors put $71 million to the ChinaAMC CSI 300 Index ETF, which is operated by China Asset Management Co. and another $33 million into Hong Kong-based CSOP Asset Management Ltd.’s SZSE ChiNext ETF. The CSOP FTSE China A50 ETF has swelled by $3 million.

This is a growing trend in the nascent Chinese ETF market. Over the past three years, the only Hong Kong-listed ETFs focused on Shanghai and Shenzhen stocks that have seen asset growth belong to local providers. This despite the fact that the top 12 funds with the lowest expense ratios belong to foreign asset managers.

“There is this idea that domestic ETF providers know all the ins-and-outs of the local market and can be successful where foreign participants struggle,” said Charles Salvador at Z-Ben Advisors, which consults foreign asset managers on Chinese ETF market. “It’s sort of ‘China against the West’ in finance.”

The divergence is taking place as local ETF providers try to catch up to their older and more mature Western peers such as BlackRock Inc. and Deutsche Bank AG, intensifying the competition in a market that historically has been hard for foreign investors to break into.

When the first Western ETF providers entered the Mainland in the early 2000s, they faced hurdles including fuzzy regulations and a lack of financial industry infrastructure. But they had little competition from local peers. That’s changed over the last few years amid a push by Chinese authorities to open up the market.

Counting Quotas

Hong Kong-based CSOP Asset Management, launched in 2008, started its first Hong Kong fund focused on A-Shares in 2012, eight years after BlackRock opened its flagship iShares FTSE A50 China Index ETF. A-shares are bought and sold domestically and are subject to ownership quotas, in contrast to B-shares, which are held by foreigners who aren’t eligible to buy A-Shares.

CSOP has a so-called Renminbi Qualified Foreign Institutional Investors quota of 46 billion yuan, as of last month. That’s the most in the world. BlackRock, the world’s largest asset manager, has 24 billion yuan worth of RQFII quota as of November.

“Foreign asset managers have an option of scaling down in China and focusing on a different region, but local ETF providers don’t,” Melody He, head of ETF and Index Solutions at CSOP, said by phone from Hong Kong. “We are dedicated to this market, even if this market is not doing well in the short run.”

It’s not just ETF providers that are struggling to challenge local players in China. Foreign finance firms in general are having trouble gaining traction there.

The Chinese unit of JPMorgan Chase & Co., JPMorgan First Capital, ranked 120 out of China’s 125 securities firms by net income in 2015, according to the Securities Association of China. UBS Securities Co., whose 296 million yuan profit was the biggest among foreign-backed joint ventures, wasn’t much better, coming in at 95.

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