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Hong Kong ETF market braces for competition from China's giants

[HONG KONG] Hong Kong's exchange-traded funds can expect to lose market share to Chinese fund managers when a scheme to mutually trade in both markets starts on Wednesday.

Hong Kong ETF managers have established a track record in providing access to restricted markets on the mainland but there is growing risk some ETFs may not survive the competition.

"This is going to be a game changer for the Hong Kong ETF market as the mainland funds can offer a bigger variety of products targeting specific sectors and themes than what is currently available here," said the head of institutional sales for Greater China at a European Bank.

Global investors are also watching how Beijing manages investor sentiment as the Shanghai index has tumbled more than 20 percent from its peak in mid-June.

Amid such volatility, a scheme allowing funds domiciled in Hong Kong and China to be sold in each other's markets will start on July 1. The initial quota is 300 billion yuan each way.

"There's already pretty fierce competition out here with RQFII ETFs and different China A-share products. They (funds sold by onshore managers) will form more competition because in theory you would think that home managers would have some kind of advantage as they are in that market and they know it better," said Brian Roberts, Asia ETF product manager at Vanguard, one of the world's biggest ETF providers.

Mr Roberts said he believes there is a greater "upside" for foreign institutions to bring a completely different set of exchange-traded products to the mainland.

Cross-border ETF products are now mainly operating under the Qualified Foreign Institutional Investor (QFII), Qualified Domestic Institutional Investor (QDII) and their renminbi denominated counterparts RQFII and RQDII.

Of the 130 ETFs available to investors in Hong Kong, 42 are focused on the mainland China A-share market, according to stock exchange data. The equivalent number in China is about 110, industry data show.

Among the oldest and the most popular China-focused ETF in Hong Kong, the ishares FTSE A50 China Index ETF has about US$11.5 billion of assets under management.

Its nearest China rivals are the Harvest Shanghai and Shenzhen 300 Index ETF and the Huatei-Pinebridge CSI 300 ETF which have a total assets under management of more than US$6 billion, Morningstar data show, but they have scaled up far more quickly, indicating strong demand.

"The market share of ETFs in Hong Kong is likely to be diluted as Chinese asset managers can sell funds overseas," said Ben Kwong, CEO at securities firm KGI Asia.

Whether the existing ETF managers need to adjust their strategies after the scheme is rolled out depends on demand for ETFs targeting China, Mr Kwong added.

In spite of current market volatility, the potential for growth in the ETF market targeting China looks promising. Data shows China stocks account for less than 1 percent in global foreign institutional portfolios.

The scope for growth is also large if comparisons are to be drawn with developed markets. The biggest ETF is the SPDR S&P 500 ETF with US$215 billion in assets under management, holding out hope for relatively nascent ETFs in China.