The $5 Trillion ETF Market Heads to China and Locals Want In

Updated on
  • CICC acquires KraneShares stake; China Post buys RBS’s funds
  • New indexing rules expected to bring in billions of dollars

A man rides a bicycle along the Bund while buildings of Pudong's Lujiazui financial district stand across the Huangpu River in Shanghai.

Photographer: Qilai Shen/Bloomberg

Call it a market swap.

That’s the logic behind this week’s investment by Beijing’s China International Capital Corp. -- an investment bank known as the Goldman Sachs of China -- in Krane Funds Advisors LLC, a New York-based issuer of exchange-traded funds focused on the mainland. The Americans get better access to Chinese markets; the locals get a platform in the U.S. Everyone wins.

The $4.5 trillion global ETF market has China in its sights and local money managers want a piece of the action. HSBC Holdings Plc estimates that as much as $500 billion could flow into China over the next five to 10 years after MSCI Inc., one of the world’s biggest indexers and a benchmark provider for hundreds of ETFs, said last month that it would include the nation’s stocks in its gauges from May 2018.

Meanwhile, wealthy Chinese are starting to branch out and are looking for ways to invest abroad, even as capital controls in the nation limit outflows.

“China asset managers are looking to expand internationally,” said David Quah, the Hong Kong-based head of ETFs at Mirae Asset Global Investments, a unit of Mirae Asset Financial Group. “ETFs are a good way to penetrate the overseas market.”

M&A Action

CICC is not the only Chinese company with global ambitions in the ETF business. China Post Global, the international asset management unit of China Post & Capital Fund Management Co., acquired the European ETF business of Royal Bank of Scotland Group Plc in March. The company plans to expand and has three new funds in the pipeline, according to Danny Dolan, a managing director at the money manager.

“These deals reflect the increased strength of China as an economy,” he said from China Post Global’s London offices. “There may not be a flurry, but it won’t be the last. Chinese houses will increasingly be in the mix when attractive businesses become available.”

Overseas, Chinese asset managers see a profitable industry that’s already attracted $250 billion this year in the U.S. alone. At home, the influx from the MSCI inclusion is likely to start slowly, with UBS Wealth Management seeing about $8 billion to $10 billion more flows into domestic stocks. But according to Goldman Sachs, about $430 billion could enter the market if China is fully included in MSCI’s indexes.

‘Timing’s Great’

CICC acquired 50.1 percent of KraneShares, which manages about $790 million across five ETFs. KraneShares will keep its management and be able to draw on the research expertise, branding and access to the domestic market of its Chinese partner to develop new funds, according to Jonathan Krane, the ETF company’s founder. 

KraneShares is considering listing some of its most successful U.S. portfolio strategies in Hong Kong, Krane said. He declined to disclose financial details of the agreement.

“The timing’s great,” said Krane. “This is a very important partnership for the U.S. and China, especially as the China markets open up and U.S. investors start looking closely at allocating to China following the MSCI announcement.”

(Updates KraneShares assets in ninth paragraph.)
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