China ETFs – It’s complicated

Navigating the waters of China ETFs

China ETFs have seen a sudden reversal of fortune over the past six months as global investors attempt to profit from the resurging Chinese equities market. While flows in and out of these ETFs have been volatile, demand looks set to rise over the coming decade.

The one-sentence summary of our analysis: current supply/demand imbalances may grow but aren’t likely to persist for more than another 24 months, while no single quality (experience, current AUM, performance) appears likely to determine which investment managers will succeed in capturing expected inflows. Key determinations from this Strategic Outlook’s analysis include:

• Ongoing multi-billion USD growth in China product AUM, whether in ETFs, mutual funds or Connect trading, significantly understates actual demand, with many investors waiting for tax, custody, or indexing clarification before buying.

• China product creation by trusted managers isn’t keeping pace with current demand, largely due to under-investment. Large territories in active management, fixed income and even the vanilla ETF spaces remain unclaimed.

• Key bottlenecks to growth in product supply are compliance and investment management skill. We offer potential remedies for compliance future-proofing, and highlight key landscape changes affecting the market for managers.

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