China, Japan ink pact on ETF investments

Chinese investors will have more access to the Japanese exchange-traded fund market thanks to the recently signed agreement for a China-Japan ETF Connect mechanism, which is another major step forward of the further opening-up of China's financial market, experts said.

The Shanghai Stock Exchange and Japan Securities Group signed an agreement on Monday to allow cross-listing of ETF products in the bourses of both countries. Qualified institutional investors in the two countries will be allowed to set up cross-border funds to invest in the ETF products in either nation. The agreement was signed during the first Sino-Japanese capital market forum held in Shanghai on Monday.

Yi Huiman, chairman of China Securities Regulatory Commission, said at the signing ceremony that the ETF Connect will help enrich China's cross-border public fund product system and help investors of both countries to seek opportunities in each other's market.

A memorandum of understanding was signed between the Shanghai Stock Exchange and the Japan Securities Group in October to seek closer cooperation, study the feasibility and make joint efforts to realize the Sino-Japanese ETF Connect.

Although the exact launch date was not disclosed, a previous Nikkei report said it would be as early as in May.

According to public information from the CSRC, four Chinese asset management companies - China Asset Management, E Fund Management, Hua An Fund Management and China Southern Asset Management - sent their applications on April 12 to establish an ETF to track Japan's bench mark securities indexes.

Nomura Asset Management, the core company within the Asset Management Division of Nomura Group, announced on Monday that it has agreed to participate in the new ETF Connect mechanism in partnership with China Asset Management.

Japanese assets currently account for a small part of the domestic investment portfolio of QDII funds. By the end of 2018, only 13 QDII funds had Japanese assets included, with the total market value registered at around 77 million yuan ($11 million), according to market tracker Wind Info. The value only took up 9.93 percent of the net value of all funds.

Statistics from Everbright Securities showed that there were a total of 224 ETF products issued in Japan by January, among which 187 tracked the Japanese domestic market. Japan's central bank holds a significant part of the issued ETF products in the country. By the end of 2018, the total value of the issued ETFs came in at 35 trillion yen ($313 billion), 65 percent of which were held by the Japanese central bank.

Liu Junwei, senior analyst at Everbright Securities, said that the ETFs in Japan will help to diversify risks as there were limited products targeting the Japanese market at present. Meanwhile, Japan's economy has moderately rebounded recently and the central bank's bulk investment will help to stabilize the products' performance to some extent. As the Japanese ETF market is complete, there will be plenty room for trading.

But Liu also warned that the central bank's large holdings will impact on companies' corporate governance and affect the entire structure of the ETF market, which might be potential risks for investing in the Japanese ETF market.