Chinese investors are funneling funds into exchange-traded funds (ETFs) at an unprecedented rate this year, opting for a passive approach amidst a sluggish stock market while patiently anticipating a market trough.
This growing trend has gained momentum as active fund managers in China face challenges in generating returns, coinciding with Beijing’s utilization of ETFs to bolster stock markets and channel funds into key sectors like technology and green energy.
ETFs, which typically mirror an index, have attracted over 400 billion yuan ($55.97 billion) this year, marking a record for annual net inflows, according to China Asset Management Co (ChinaAMC), the leading mutual fund house in the sector.
“When the market experiences a downturn, many investors turn to ETFs to speculate on a bottom,” noted Xu Meng, Executive General Manager of Quantitative Investment at ChinaAMC, drawing parallels with global ETF giants Vanguard and BlackRock’s iShares.
In contrast, active equity and allocation funds have faced net outflows of approximately 360 billion yuan, as investors actively seek more attractive propositions within the ETF landscape, according to Morningstar Senior Analyst Andy Huang.
China’s active equity funds have witnessed a decline of around 12% this year, reflecting the ongoing challenges in the country’s post-pandemic economic recovery, compared to a 1.9% dip in the benchmark Shanghai Composite Index.
“I have gradually shifted from active funds to ETFs,” shared retail investor Simon Zhang, expressing dissatisfaction with the underperformance of active fund managers.
During the Jan-Sept period, total assets under management (AUM) in China’s stock ETFs surged by 33% to 1.48 trillion yuan, while AUM for active equity funds dropped by 13% to 3.9 trillion yuan, as reported by fund consultancy Z-Ben Advisors.
The surge in ETF popularity can be attributed, in part, to China’s sovereign wealth fund Central Huijin Investment, which began acquiring blue-chip ETFs in late October to stabilize the fluctuating stock market.
Ben Charoenwong, Assistant Professor of Finance at the National University of Singapore (NUS) Business School, emphasized that ETFs offer a channel to direct funds into innovative and small companies that may struggle to secure essential capital in a sluggish economy.
Recent statements from Shanghai Stock Exchange head Cai Jianchun underscored the pivotal role of indexes in directing money flows, emphasizing that index investing must align with the central government’s pursuit of technological independence.
Reflecting these efforts, funds tracking China’s tech-focused STAR50 index have surpassed 145 billion yuan, while capital channeled into state-owned sectors through ETFs has also witnessed a notable increase.
In a market featuring over 50 ETF players such as E Fund Management Co and Huatai-PineBridge Investments, competition is intensifying. However, Xu from ChinaAMC believes that the sector still has room for growth, asserting that, given the escalating challenges of beating the market in China, “passive investment will likely outpace active investment in China over the next three to five years, at least.”
(This story has been corrected to fix the figure to 360 billion yuan in paragraph 5.)
($1 = 7.1463 Chinese yuan renminbi)
