Chinese ETF inflows have increased fivefold in three years, Morningstar says

Chinese customs officials raise a Chinese flag during a rehearsal for a flag-raising ceremony in Shanghai.

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According to Morningstar, Chinese ETFs have seen “staggering” growth over the past five years, with inflows consistently reaching new heights.

“Annual inflows into China ETFs have increased nearly fivefold over the past three years,” said Wanda Wang, research manager at Morningstar, in a June report.

According to data from the U.S. financial services company, total annual inflows into Chinese ETFs rose to 387.2 billion yuan in 2022 from 127.2 billion Chinese yuan ($17.49 billion) in 2021. In 2023, the figure was 604.3 billion yuan.

By the end of last year, the total assets under management (AUM) of ETFs in China had more than doubled from the end of 2020, reaching 1.82 trillion yuan.

“Between 2018 and 2023, annual growth in ETF assets under management in China averaged a whopping 40%, with total AUM reaching record highs each year,” the Morningstar report said.

The broader China A-share market has been “tepid” since 2022, with only bright spots in certain niche sectors, the financial services firm said.

“The growth of the Chinese ETF market has been explosive in recent years,” Wang told CNBC.

Against this backdrop, it became a challenge for actively managed funds to outperform expectations. This contributed to the growth of the Chinese ETF market, doubling its total assets under management to 2 trillion yuan in less than three years.

“Institutional investors mainly invest in broad index ETFs. This is the main component of the rapid inflow of ETFs into China,” Wang said.

'Immense attraction' for equity ETFs

Equity products in particular have gained enormous popularity over the past three years, accounting for 96% of the total 870 ETFs in China by the end of 2023.

Inflows and annual AUM of Chinese equity ETFs also hit record highs, Wang wrote. Annual inflows in 2023 alone reached 575.6 billion yuan, surpassing the total inflows between 2019 and 2022.

In addition, due to the booming semiconductor sector, large amounts were invested in Morningstar's so-called sector equity tech and communications category, Wang added.

In contrast, the report shows that there was net outflow in the equity, financial and real estate sectors.

Fixed income ETFs, which account for 4% of total ETFs, were slower to develop in terms of product launches and AUM growth. Commodity ETFs, which were largely gold ETFs, accounted for less than 2%.

Morningstar noted that the ETF market in China is generally concentrated among leading providers such as China Asset Management, E Fund Management and Huatai-PineBridge. These are the three largest ETF providers by assets under management.

CNBC's Evelyn Cheng contributed to this report.

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