
Although the newly acquired ETFs, which bear the name Market Access, are Europe-domiciled, they will soon be listed in Asia too. China Post Global plans to cross-list the funds immediately in Hong Kong. Shaun Cai, president of China Post Global, says the company hopes to sell the funds not only in Hong Kong but also in mainland China. The only question is how. One mechanism might appear to be the Mutual Recognition of Funds (MRF) scheme between Hong Kong and mainland China. ETFs are not yet eligible under the programme, which allows qualifying Hong Kong-domiciled funds to be distributed in mainland China (mainland Chinese funds enjoy the same treatment in Hong Kong). However, Chinese and Hong Kong regulators are widely expected to make ETFs eligible for registration soon. The problem is the MRF scheme is so far open only to Hong Kong or Chinese-domiciled funds and the new ETFs, being domiciled in Europe, would not qualify. “As far as we can tell, it would be difficult to use this route,” says Cai.

The difficulties China Post Global will face in distributing its new ETFs in its home market are instructive because they are in essence the same difficulties international firms face in trying to bring their products into Asia’s largest market. China is where the growth is, but getting foreign funds into China is difficult (see our roundtable on pages 28-33). It is no wonder, then, that international firms are instead distributing their ETFs in markets such as Korea, Taiwan, Hong Kong and, of course, Japan. ETF providers face challenges in these markets too, though, especially in the retail sector. One is that distribution of funds to retail investors in much of Asia is still largely controlled by banks, and ETFs, with their relatively low fees, are typically not profitable for banks to sell. Justin Ong, asset and wealth management industry leader at consultancy PwC, says it may take the rise of internet and mobile-based distribution channels, including so-called robo-advisers, to make ETFs truly popular among retail clients. “The distribution channel has to change. When we see adviser platforms coming in, that’s when ETF flows will grow,” he says. Regulation also stands in the way of some kinds of ETF in Asia. Leveraged and inverse ETFs, which allow investors to magnify returns by taking on debt or to take short positions on an index, are a popular choice for investors in Japan and Korea. In Taiwan, figures from the Taiwan Stock Exchange state that the overall daily trading volume of ETFs rose 45% last year, a result that consultancy Cerulli Associates attributes to the introduction of leveraged and inverse ETFs. However, in many Asian markets, including China, such products have not been approved by local regulators. The authorities in Hong Kong have signalled that they may approve them soon, which could allow Korean firms such as Samsung Asset Management and Mirae Asset Management to make a grab for assets in Hong Kong with new product launches. Other countries will have to wait. It may be governments that have the biggest influence. As Asian countries develop their pension systems in response to ageing populations, many observers have predicted a role for passive funds, such as ETFs, which can provide the ‘core’ of schemes that are likely to be of the defined contribution type. No one doubts the upward growth of assets for passive funds in Asia, but it seems the problems facing traditional fund distribution in the continent – fragmented markets, unhelpful regulation and capital controls in countries such as China – apply to ETFs as surely as they do to actively managed funds. The boom in this market, assuming it continues, will not happen without challenges. ©2016 funds global asia