China’s ETF market experienced a banner year in 2021 and is poised for further rapid growth over the next 12 months, according to research from Brown Brothers Harriman (BBH).
The growth of Greater China’s ETF industry shows no signs of slowing.
The ETF custodian and administrator recently released its fifth annual Greater China ETF Investor Survey which measured the expectations and preferences of 157 ETF investors in mainland China, Hong Kong, and Taiwan.
Institutional investors and fund managers represented 42% and 43% of the survey’s respondents, respectively, while financial advisers made up the remaining 15%.
A vast majority (87%) of those interviewed manage more than $100 million in assets while two-thirds (66%) currently invest over a quarter of their portfolio in ETFs.
ETF assets under management in Greater China grew approximately 11% to reach $300 billion in 2021, while mainland China experienced a record issuance of 271 ETFs during the year.
BBH credits the sustained development of China’s ETF market to educational efforts around the structural benefits of the ETF wrapper, the commitment from regional regulators and stock exchanges to develop ETF infrastructure, and the creation of new innovative ETF strategies.
The survey found that appetite for ETFs in Greater China is at its highest level ever recorded with 84% of those interviewed expecting to increase their allocation to ETFs over the next year. Amongst institutional investors, the figure is a staggering 95%.
Mainland China again appears poised for the greatest growth in ETF adoption with 90% of investors there indicating that they plan to increase their allocation to ETFs, although this figure is slightly down from 92% in 2021. ETF demand has notably accelerated in Hong Kong and Taiwan where 78% and 81% of investors, respectively, plan to grow their ETF allocations over the next year, up from 66% and 58% in the previous year.
The significant interest seen in thematic ETFs last year continues to grow, especially in mainland China where 96% of ETF investors indicated they plan on increasing exposure to thematic ETFs this year (up from 91% in 2021). The proportion of investors in Hong Kong and Taiwan that are planning to increase their allocation to thematic ETFs was found to be 78% and 70%, respectively.
According to BBH, demand for thematic ETFs is being supported by several structural trends including urbanization, the continued rise of China’s middle class, the transition to a technology-focused economy, and China’s stated goal of being carbon neutral by 2060. These trends are driving demand for investments in areas like renewable energy, electric vehicles, and battery storage.
Notably, many investors are also gravitating toward digital assets and crypto ETFs with two-thirds (66%) of respondents across Greater China planning to add these funds to their portfolios in 2022.
ESG-focused ETFs, meanwhile, are also continuing to attract demand from a growing base of investors wishing to integrate socially responsible considerations within their portfolios. A vast majority (96%) of investors in mainland China are expecting to increase their allocation to ESG-focused ETFs over the next year, while the figures for Hong Kong and Taiwan were 86% and 76%, respectively.
However, according to respondents, confusion around what constitutes an ESG fund remains the highest barrier to adoption. BBH notes that policymakers across Greater China are working to enhance regulations by further integrating climate-related risks into investment management and risk processes.