China as an ETF hub
Dr. Hing Tang has been involved with ETFs since the earliest days of the Tracker Fund of Hong Kong and the introduction of State Street’s SPDR products to the Asian exchanges. He is now in charge of ETF developments as Investment Director, Quants at BOCI - Prudential. They recently listed a Shanghai 50, large cap A shares fund in Hong Kong, targeting $30m of assets raised from the regional launch.
Tang sees the Shanghai 50 as a complement to existing ETFs linked to the FTSE/Xinhua 25 and the CSI 300. Ultimately though, he believes the Shanghai 50 will supplant those two as the most popular ETF index for China investors. “In future, when people talk about A shares, they will talk about the CSI 300, or if they talk large cap it will be in reference to the Shanghai 50. China investors have not had the choice until now, so we expect hedge funds, for example, to use this as an arbitrage opportunity. This is a useful diversification tool providing long term upside potential.”
Tang sees China competing more forcefully for ETF listings in future. He is in close contact with government officials charged with advancing Shanghai’s position as a financial centre. “They want people to understand the growth potential of the Shanghai stock market. We know that the Chinese government is keen to have Shanghai become a financial hub. A taskforce has been formed at senior level .The legal system and the rules of business in Hong Kong have always stood us in good stead. But with this new initiative in Shanghai, I think Hong Kong will find it much more competitive in future.”
He sees great potential in the Greater China market though, especially since the regulators in Hong Kong, Beijing and Taipei are now talking, apparently. For its part, BOCI - Prudential has been in talks with potential partners in Taiwan (Polaris is the dominant player) “but the point is that Taiwan is also talking to Shanghai, so it’s a competitive market. Everyone wants to be the first with a Greater China product. Cross-listing is the way to go. With the integration of China, Taiwan and Hong Kong, we will become a big trading bloc.”
Since 2008, Polaris in Taipei has been in talks with potential partners across the region, with the view to developing Greater China ETFs and cross listing on exchanges from Singapore to Shanghai.
President of Polaris, Julian Liu Tsung-sheng, says “Our focus right now is to take our ETFs out of Taiwan. There are still some hurdles to overcome, some regulatory, some competitive. For example, we are still waiting for Hong Kong to sign the side letter that will allow the cross listing of our Taiwan Top Fifty and the CSI 300.”
Meanwhile Polaris in Hong Kong has the license to issue the Taiwan Top 50 there. In Taiwan, it has signed an MOU with BOCI-Prudential to list the CSI 300 in Taiwan in May, but that is also subject to regulatory approval. Liu is confident, though, that both regulators will sign up in the coming weeks. He adds that Polaris is looking to bring other cross listings to Taiwan, including the CSI 300. “We have a long standing relationship with State Street Global Advisors, so we hope to work with them in bringing the Asian Bond Fund and the Tracker Fund of Hong Kong to list in Taiwan as well.”
Taiwan is an open market and the regulations allow global players to work there, but the best way for them to do this, says Liu, is to work with a local player. Polaris has a dominant position in Taiwan, not necessarily in terms of products - Polaris has seven local ETFs while Fubon has four - but Polaris has greater than 95% market share. In Taiwan, assets under management in ETFs rose by 13% during a period when the market fell 46%. The participation of retail investors has doubled, from 40 to 80,000 since 2008. Taiwanese ETFs are structured using simple replication of recognized indices since the Taiwanese regulators do not recognize synthetic replication.
Liu recognizes that the market needs more product to maximise its appeal to institutional investors. “The listing of ETFs is not the milestone. It is the expansion of the range of ETFs and listing on multiple markets that will open it up. The global ETF market is the key. For regional players, the different time zones, currency regimes, settlement systems, will generate a lot of arbitrage opportunities. This is something we can supervise for an institutional investor.”
Further afield, Liu regards Singapore as a key market, after Greater China: “the secondary market there is small. The plan is that each new style of ETF could be launched in Hong Kong and then Singapore. We are talking to some of the US players (including Russell) to develop some exotic products for listing on the Singapore Exchange.”
The big theme for the region, though, is Greater China. Liu says, “Currently there is no single product that provides that exposure. We think we will be the first mover. We will launch the Greater China Index Fund in May, with the Greater China ETF to follow in the fourth quarter.”
Lyxor’s Joseph Ho is skeptical of claims that cross listings are going to happen in Greater China any time soon. “It’s easy to talk about it, but you need to ensure the market making is there. The investor has to have confidence in your ETF, to know that they can get in and out at fair value. If they don’t provide tight spreads and trading volume, that might hurt the success of cross listings.” He says Lyxor is working with dedicated market makers to ensure spreads are competitive. “That is the key issue. It’s OK if you are investing in the Tracker Fund of Hong Kong. You can see the Hang Seng trading every day. There is always that possible arbitrage opportunity that keeps it in check. For the less liquid markets, or where you don’t have compatible time zones, the market making is extremely important.”
The other issue is regulatory. While Lyxor is exploring the possibility of cross listing in China and elsewhere, the mutual recognition afforded UCITS products in Hong Kong and Singapore gives those centres a major advantage. “We know that some of the other Asian centres are reviewing their regulations to make it easier to recognize overseas listed ETFs,” says Ho.