The US$5t ETF market heads to China and locals want in

[LONDON] Call it a market swap.

That's the logic behind this week's investment by Beijing's China International Capital Corp - an investment bank known as the Goldman Sachs of China - in Krane Funds Advisors LLC, a New York-based issuer of exchange-traded funds focused on the mainland. The Americans get better access to Chinese markets; the locals get a platform in the US Everyone wins.

The US$4.5 trillion global ETF market has China in its sights and local money managers want a piece of the action. HSBC Holdings estimates that as much as US$500 billion could flow into China over the next five to 10 years after MSCI, one of the world's biggest indexers and a benchmark provider for hundreds of ETFs, said last month that it would include the nation's stocks in its gauges from May 2018.

Meanwhile, wealthy Chinese are starting to branch out and are looking for ways to invest abroad, even as capital controls in the nation limit outflows.

"China asset managers are looking to expand internationally," said David Quah, the Hong Kong-based head of ETFs at Mirae Asset Global Investments, a unit of Mirae Asset Financial Group.

"ETFs are a good way to penetrate the overseas market."

CICC is not the only Chinese company with global ambitions in the ETF business.

China Post Global, the international asset management unit of China Post & Capital Fund Management, acquired the European ETF business of Royal Bank of Scotland Group in March.

The company plans to expand and has three new funds in the pipeline, according to Danny Dolan, a managing director at the money manager.

"These deals reflect the increased strength of China as an economy," he said from China Post Global's London offices.

"There may not be a flurry, but it won't be the last. Chinese houses will increasingly be in the mix when attractive businesses become available."

Overseas, Chinese asset managers see a profitable industry that's already attracted US$250 billion this year in the US alone. At home, the influx from the MSCI inclusion is likely to start slowly, with UBS Wealth Management seeing about US$8 billion to US$10 billion more flows into domestic stocks. But according to Goldman Sachs, about US$430 billion could enter the market if China is fully included in MSCI's indexes.

CICC acquired 50.1 per cent of KraneShares, which manages about US$790 million across five ETFs. KraneShares will keep its management and be able to draw on the research expertise, branding and access to the domestic market of its Chinese partner to develop new funds, according to Jonathan Krane, the ETF company's founder. 

KraneShares is considering listing some of its most successful US portfolio strategies in Hong Kong, Mr Krane said. He declined to disclose financial details of the agreement.

"The timing's great," said Mr Krane.

"This is a very important partnership for the US and China, especially as the China markets open up and US investors start looking closely at allocating to China following the MSCI announcement."

BLOOMBERG