China’s domestic investors are becoming more sophisticated yet with exchange traded funds (ETFs) still prefer money market and plain products.
"The majority (of ETF investments) relates to the parking of money in the money market," says David Lai, partner and co-chief investment officer of Premia Partners.
"This depends on market conditions and the yield curve. Domestic equities have not performed well but they still attracted substantial investments. For the fixed income ETFs, it is tough for money to flow into the fixed income side because of the yield curve," he adds.
ETF penetration in China's onshore market stands at 1.1%, based on the combined free-flow market capitalization of the Shanghai and Shenzhen exchanges. Total assets under management (AUM) of equity ETFs alone stands at about US$35 billion, while the combined free-flow market cap of both exchanges hit US$3.1 trillion at end April 2018, Lai adds citing Bloomberg figures.
He notes that there are 165 ETFs in the onshore market with a combined AUM of US$82 billion. Of these, 53% are in money market products, 42% equities, 2.4% commodities, 1.6% fixed income and 1% mixed.
The onshore ETF market is restricted for foreign investors. International investors own less than 2% of China's government bond market but regulators are opening up the interbank bond market and removing quotas for international investors.
For equity investors the progressive opening up of the mainland market, combined with the expected MSCI inclusion scheduled for June, will boost overseas access to the onshore market.