China Finance with A Cup of Tea Episode 3: Passive Investment and ETFs in China

Passive investment has been booming in the global market in recent years. As market effectiveness improves, outperforming returns are increasingly difficult to achieve. Alpha returns are competing with indices. High transparency and low management fees are also contributing to the trend of passive investment eating into active.

China is no exception. Since the first index fund was introduced in 2002, the country has been catching up with the global index trend. As of January 2022, there were more than 1,500 index funds totaling 1.8 trillion yuan ($290 billion), in which exchange-traded funds (ETFs) played a key role. Chinese ETFs held 1.4 trillion yuan of assets at year-end, up 28% from the beginning of the year.

Looking ahead, China’s passive investment will be supported by financial regulators’ determination to draw in more long-term capital. Better coverage of sectors, improved interconnectivity, and increased supply of derivatives and other hedging tools are all contributing to a larger future. However, this market is dwarfed in size by its peers in developed economies, and many products offered are considered homogeneous in structure and performance.

In the third episode of “China Finance with a Cup of Tea,” Caixin invited Dr. Jason HSU, founder, chairman & CIO of Rayliant Global Advisors, and FAN Bing, director and senior portfolio manager at E Fund Management, to share their insights on passive investment in China and what international investors can do to navigate this market.