“You launch an ETF in China and it’s hard to get the right staff, and regulations and language are more obstacles. So why not drop the ETFs into Hong Kong, get the benefits of the legal system, use English language, and sell to China?”
Chinese regulators prefer ETFs, he said. “Transparency and daily dealing make for a better product, and regulators want to encourage a diversified portfolio, so the Chinese are happy to adopt ETFs early.”
Mutual fund plans
EIP has China connections. CLSA, which is owned by China’s Citic Securities, acquired a 49% stake in the firm’s ETF business in November 2014.
EIP runs eight Hong Kong-domiciled ETFs. Seven were launched in 2012 and target several Asian countries, including Indonesia, India and Taiwan.
The most recent product, launched in April, is the XIE shares FTSE Chimerica, an ETF tracking US-listed China stocks mainly in the internet sector such as Tencent and Baidu.
The firm also intends to launch mutual funds this year, but Bland would give few details. “China fixed income is interesting. The biggest problem you’ll see is the RMB ceiling on issuance.”
Among the firms products, the Chimerica ETF has the largest AUM at about $216m, according to Hong Kong Stock Exchange data.
Bland beieves the product is well-positioned to ride ecommerce growth in China.
“China will install 700,000 base stations by 2017, which means everyone in China will have 4G access. You can be everywhere, even in a paddy field, and with an RMB 300 smartphone, get a product delivered to the door. All of that is controlled by 20 or so stocks.”
ETFs have trouble building up AUM in Asia, and several have closed for that reason. Mutual funds remain predominant, and they make up 97% of products offered by fund managers in Greater China, Bland said.
By comparison, 20% of households in the US hold ETFs. “In the US, you can buy a robotics or casino ETF.
“Liquidity is a big problem with ETFs. There is a scarcity of market makers in Hong Kong.
“The high frequency-style model in the US is not here yet. Exchanges have decided that’s not a priority. That’s changing, and they want to encourage market makers to come here.”
ETFs are unpopular not just because of the investors, but because the majority of private banks, wealth managers and advisors do not get commission on the products, Bland said.
“That retail investor base here in Hong Kong will get the same enthusiasm [as China retail investors], but not until we break this model of pay-to-play.
“Australia and Canada converted [to the fee-based model] 10 years ago and the US, 20 years ago. Hong Kong is the third largest financial market in the world and the Securities and Futures Commission has really dragged their feet on the issue. They have huge pressure from fund houses saying a [fee-based model] is detrimental to our business.
“The average holding of a mutual fund in Hong Kong is six months. The sales guys don’t want to let go of their golden goose.”