Mutual recognition key driver for Asia ETF growth, according to BNY Mellon

13 May 2014   Category: News, Asia, China, Global, Hong Kong, Asia Pacific   By Asia Asset Management

Asia-Pacific ETF AUM will reach US$250 billion by 2016, mainly due to the impact of the mutual recognition scheme between Hong Kong and mainland China, according to BNY Mellon.   

The New York-based custodian giant said in a statement that Hong Kong and the Mainland’s ETF market is expected to outpace growth of 15% to 20% per annum across Asia-Pacific as a whole.

Rex Wong, managing director at BNY Mellon’s Asia asset servicing business, said that improvements to market infrastructure, product development and aspects of investor education are needed to bring about the full potential of mutual recognition for ETFs.

“There’s great potential for mutual recognition to make life easier for ETF promoters and drive product design and development as they expand their footprint in the Asia-Pacific region. But success in building the ETF market in China and sustaining product development also requires changes in local market infrastructure and, most importantly, regulatory reforms,” he said.

Mr. Wong said that the self-governing territory and China today accounted for 35% of total ETF AUM in the region, with Japan making up around 45%. Regionally, total AUM currently stands at around $165 billion.

Mr. Wong added that he anticipated mutual recognition to bring about ETF developments in the area of China A-share products listed in the Mainland, due to continued interest from Asian investors in the country’s domestic market.

In the medium term, investors will also be able to access more diverse asset classes including international equities, bonds and commodities, he continued. That will give them an exchange-listed option to gain exposure to global markets and other asset classes that do not currently exist today in their home market.

“But these are modest developments, essentially low hanging fruit. New market infrastructure is needed in order for China’s ETF market to reach a stage of development that resembles the big ETF markets in Asia-Pacific, which are Japan, Hong Kong and Korea,” Mr. Wong said.

In terms of promoting ETF liquidity and enhancing the ease of currency transfers, Mr. Wong stated that there needs to be more broker-dealers acting as ETF market makers, and that their active participation to provide liquidity is essential to the survival of ETFs.

The ETF market-making business in China is relatively new. However, many global broker-dealers already have a presence in Hong Kong, and can step into this role if regulation so permits it. They can bring their global trading platforms and expertise, and promote the development of this sector in China, he said.

Mr. Wong said ETFs that use multiple active market makers that can access multiple liquid alternative hedges in addition to its basket would find it easier to attract assets and subsequently survive. He also stressed the need for a diverse range of futures and options, as well as a liquid derivatives market for ETFs. Removing restrictions on the short selling of ETFs would also lower the cost that market makers face and improve their ability to provide liquidity in the market, Mr. Wong continued.

Finally, he called for a more streamlined process for transferring RMB across borders, as restrictions on and delays in RMB transfers can prevent fund managers from investing in the underlying index shares.

Mr. Wong added that once regulatory and infrastructural foundations are in place, the market would be able to support a greater number of ETFs and investment styles covering a variety of industry sectors, asset classes and investment strategies.