China ETFs shrivel as Shanghai-Hong Kong stock link heats up

By Saikat Chatterjee and Michelle Chen HONG KONG, April 23 (Reuters) - China-focused exchange-traded funds (ETFs) run by investment banks and Chinese fund managers have lost some lustre as regulatory changes make it easier for investors to buy into China's booming stock market directly. After a slow start, the landmark Shanghai-Hong Kong stock connect pipeline has begun to flow, increasingly taking more business from these once-popular investment vehicles. The global $30 billion China-focused ETF market, which tracks the performance of onshore equities, used to be the main channel for foreign investors to access performance of Chinese shares. However, as onshore markets rallied and regulators made it possible for investors to buy shares in Shanghai directly under the cross-border scheme, Tae Yoo, head of client business development at the Hong Kong Stock Exchange said broader institutional participation via the pipeline has grown and continues to grow. The growth in flows via the stock connect link, helped by a 36 percent rally in the Shanghai stock index since the start of the year, contrasts with outflows from China-focused ETFs. ETFs under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, for example, saw net outflows of 4.9 billion yuan ($790.7 million) in March. The majority of the outflow came from flagship CSOP's FTSE China A50 ETF, Morningstar data showed. "Many foreign investors prefer the stock connect channel after it became available last November, since they do not have to pay the management fees which are needed under ETFs," said a fund manager in Hong Kong. While China has a tiny share of the $2.6 trillion global ETF market at end-2014, it has a relatively large market share in Asia, Deutsche Bank said. As China accelerates the pace of market reforms, investments via ETFs are expected to decline in the long term, market watchers predict. The Shenzhen-Hong Kong stock connect link expected later this year will capture more trading flows. "We recently got clearance to participate in the stock connect scheme and if you are a thematic China investor, you want to participate directly rather than via participatory notes or ETFs," said Sherwood Zhang, a portfolio manager at U.S-based Matthews Asia. To be sure, fund managers believe the ETF channel still holds value for investors who aren't familiar with China but cannot ignore market opportunities. "Investors in the U.S. and Europe are generally not too familiar about specific China A-shares, and the ETF channel helps here, and they are comfortable participating via ETFs," said Marco Montanari, head of passive asset management, Asia-Pacific at Deutsche Asset & Wealth Management. ($1 = 6.1968 Chinese yuan) (Editing by Jacqueline Wong)