ETFs play an important role for asset managers entering mainland China

Sarah Clark: Hello, welcome to Fund Forum Asia 2017. I’m Sarah Clarke coming to you from the JW Marriott in Hong Kong. I’m joined by Chris Pigott who’s the head of Hong Kong ETF Services at Brown Brothers Harriman. Thank you very much for joining us. Hong Kong has ambitions to further develop as an international ETF capital formation center, how far has it come and what does it need to do to achieve this ambition?

Chris Pigott: There’s been a lot of development recently especially when you look at the product side of things. Recently there was the new approvals for leveraged and inverse ETFs here in Hong Kong that’s kind of further expanding more innovative products into the marketplace. In conjunction with that we recently did a survey really focused on Hong Kong as a fund domicile with the timeline of 2025 and there was three main areas because we asked a question specifically about this. There was one around increasing passporting with China specific to ETFs, there was another one around more streamlined regulatory approvals, and the third one was really around reforms of a commission landscape here when you talk about distribution so those are the three main areas of focus for asset managers.

Sarah Clark: So the inclusion of ETFs in stock connect is on the horizon. How do you see the link developing?

Chris Pigott: There’s probably three main areas I think that we’re focused on when we look at that in the inclusion of ETFs. One is a regulatory point of view, so how does the regulatory framework actually come about and is it look like what mutual recognition was set up as or is it more aligned with stock connect; we hope it’s more aligned with stock connect.  There’s the marketing and distribution side which is going to be a unique aspect in terms of how can these funds generate demand in Mainland China, and really the third one is the operational components so the operational side of things is a little bit unique. How ETFs settle in China between exchanges are much different than how A-shares settle so there’s some work that needs to be done there around normalizing the operating infrastructure.

Sarah Clark: So how do or should ETFs fit into asset manager’s plans and strategies to access China?

Chris Pigott: I think it's an important component as we look towards the future because the passporting component is a significant transformation probably for the local ETF industry here. ETFs are going to be a relatively important component of asset manager’s strategies for accessing the mainland in the future.

Sarah Clark: And it’s building up, there’s still a lot of growth.

Chris Pigott: There is a lot of growth and I think it’s interesting if you look at the infrastructure within Hong Kong there’s a lot of efforts underway by the Hong Kong exchange related to helping to evolve the operating infrastructure to help make it more efficient for managers to launch products here in Hong Kong and also really try to develop the local ETF industry which by default will help those managers sell those products into the mainland when that platform becomes available.

Sarah Clark: Final question, what are the challenges and opportunities that are facing those managers when implementing strategies on ETFs?

Chris Pigott: I think one of the big ones and one of the points that came out of the survey that we did as well is really the distribution infrastructure. So if you look in Hong Kong the market is very bank focused in terms of distribution so commission-based take distribution channels. If you look at transforming that and accessing mainland China, it’s a similar type of operating infrastructure specific to the distribution landscape so really trying to understand how you can actually distribute the products as well as generating interest. There’s a lot of focus on going into more online channels as part of our panel that we discussed here, there’s a lot of discussion around Wechat and the utilization of online channels to really generate interest for local asset managers here with ETF platforms.

Sarah Clark: Chris Pigott, thank you for joining us.

The positions expressed in this material are those of the author as of April 24, 2017 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only. Furthermore, these positions are not intended to predict or guarantee the future performance of any currencies or markets. This material should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. IS-2017-04-27-2832