The increasing popularity of exchange-traded funds (ETFs) across the Asia-Pacific region will accelerate development of ETFs in Hong Kong, according to Rex Wong, managing director within BNY Mellon’s Asia Asset Servicing business.
Wong notes that the opening of China’s Renminbi (RMB) Qualified Foreign Institutional Investor (RQFII) will lead to more RMB-denominated ETFs, as regulators allow global fund managers into the market, bringing expertise in structuring specialty financial products.
“We expect developments on these fronts to spur the creation of a range of investment styles and options of China-focused ETFs … The most likely ETFs to emerge in the short-term are specialized equity funds, such as those comprising equities of a particular industry sector or geographic region, and fixed income ETFs. In the medium term, there is scope for a range of more exotic or niche products, such as real estate sector and commodity ETFs built around precious metals.”
The growth of RMB-denominated ETFs would be driven by a more inclusive RQFII program, since RQFII license recipients have been the primary sponsors of ETFs that invest in China’s capital markets, as well as the development of indices around which asset managers can structure new funds, says Wong.
“The number of RQFII licenses highly likely to be set to rise after the recent decision by the China Securities Regulatory Commission to extend RQFII eligibility to non-Chinese asset managers, including Hong Kong-based subsidiaries of global fund houses. We expect the fund management industry to respond to the opening of China’s securities market and give a boost to Hong Kong’s ETF industry.”
The development of indices such as the CESC Cross-Border Index Series by the China Exchanges Services Company, a joint venture between the stock exchanges in Shanghai, Shenzhen and Hong Kong, will also allow financial institutions to construct RMB-denominated ETFs and give investors exposure to a regional basket of equities.
The growth of the ETF market will increase demand for better infrastructure, says Wong: “The growing sophistication of the ETF market in Hong Kong will put new demands on custody and asset servicing companies. The complexity of ETF structures and securities in which they invest will require more advanced systems for creating and tracking the value of ‘ETF baskets.’”
Wong also discusses future trends: “While the near-term trends are encouraging for the future of RMB ETFs, the range of ETF’s tracking China’s securities markets will not reach full potential until regulators further loosen restrictions on the amount of RMB that foreign asset managers can raise and invest in the A-share market.
“The current level of foreign investment in China’s securities market remains extremely low by global standards. Foreign investors collectively hold approximately 1.5% of Chinese securities, compared to over 20% on average for other foreign markets, according to BNY Mellon. Given investors’ interest in China and the continued growth of its economy, this disparity should correct over time.”
RMB-Denominated ETFs Market to Expand, Says BNY Mellon
The increasing popularity of exchange-traded funds (ETFs) across the Asia-Pacific region will accelerate development of ETFs in Hong Kong, according to Rex Wong, managing director within BNY Mellon’s Asia Asset Servicing business.