Recently, there has been a notable shift in the trading volume of two major exchange-traded funds (ETFs) in China: the CSI 300 ETF and the SSE 50 ETF. Both of these ETFs, which represent broader market indices, have exhibited an extraordinary streak of nine consecutive days of gains. This bullish trend reflects a growing confidence among investors and signals significant movements in capital allocation.
The dynamics of the indices' ascension reveal a strategic play by institutional investors who have been pouring considerable funds into these ETFs. It seems that the involvement of substantial, mysterious capital has become somewhat of an open secret, particularly with recent second-quarter disclosures shedding light on institutional ownership patterns. Media outlets and industry insiders have pointed towards a prominent player: China Central Huijin Investment Ltd. (commonly referred to as Central Huijin), which has been accumulating shares in these ETFs.
For context, Central Huijin has previously announced its commitment to purchasing ETFs as a means of fostering stability in the financial markets. This initiative has been interpreted by many as a deliberate effort to bolster the market's resilience amidst fluctuating economic conditions.
Industry analysts suggest that the increasing positions in various broad-based ETFs could play a crucial role in enhancing market stability and restoring investor confidence, potentially acting as a catalyst for a market rebound.
Heavy Investment in Major ETFs
As of July 19, both the CSI 300 Index and the SSE 50 Index have sustained a remarkable nine-day winning streak. The contribution of ETFs to these upward movements cannot be understated, as they have facilitated ease of access for both retail and institutional investors.
According to data from Dongfang Caifu Choice, from July 9 to July 19, the leading stock-based ETF by trading volume was the CSI 300 ETF managed by Huatai-PB, which recorded a staggering volume of 48.959 billion yuan. Following closely was the SSE 50 ETF managed by China Asset Management, with a trading volume of 27.605 billion yuan. Additionally, other competing ETFs from E Fund, Harvest, and Huaxia also enjoyed substantial trading activity during this period, demonstrating a clear preference for broad-based ETFs over sector-specific instruments.
This trend indicates a growing interest in broad-based ETFs compared with thematic or industry-specific ETFs, reflecting a collective investor sentiment that favors diversified exposure to the market.
Since the beginning of the year, various broad-based ETFs have continually attracted positive assessments from investors. Reports highlighted increasing volumes for the aforementioned strategic ETFs, asserting their position as key players in the market.
Recent public disclosures reveal that a significant portion, exceeding 20%, of the shares in the Huatai-PB CSI 300 ETF is held by a mysterious entity referred to as “Institution 1.” Notably, this institution increased its holdings from 32.603 billion shares at the end of the first quarter to 35.654 billion by the second quarter.
Speculation surrounding the identity of “Institution 1” points predominantly towards Central Huijin, particularly as past reports indicated a consistent holding pattern that aligns perfectly with the figures disclosed this quarter.
Central Huijin made public announcements in October 2022 and February 2023, confirming its strategy of accumulating ETFs to reinforce market stability. Such statements helped to affirm the perceived long-term value of ETFs within the investment community.
The Value of Major Indices
Investment in the Chinese stock market remains complex this year, as the Shanghai Composite Index has been oscillating around the 3,000-point threshold. The market volatility, especially impacting active equity funds, has led some funds to experience considerable drawdowns. In contrast, broad-based ETFs representing large indices have maintained positive returns throughout the year.
Recent second-quarter reports indicate an acknowledgment of the investment value of the CSI 300 Index by several fund managers, highlighting its potential in the current market landscape.
For instance, Wu Hao, the fund manager of CITIC Prudential's Quarterly Red Fund, noted in the second-quarter report that the CSI 300 Index's price-to-book ratio falls within a historically low percentile, suggesting limited systemic risk and highlighting potential structural opportunities.
The fund manager of E Fund’s CSI 300 ETF remarked that this index encompasses leading enterprises across major sectors of the Chinese economy. Therefore, in the long run, these firms' earnings will likely correlate with overall economic growth.
He emphasized further that current valuation levels of the A-shares remain at a historical low and provide compelling investment allure when compared both domestically and globally.
The recurring enhancements from Central Huijin towards broad-based ETFs have not only showcased a bullish stance but have also been perceived as a signal to stabilize the market. Bai Yili, a wealth researcher from Pai Pai Wang, highlighted several motivations behind these actions: first, the belief that the market has bottomed out; second, the reassurance it offers to investors; and third, a historical tendency for Central Huijin to bottom-feed through broad-based ETFs, thus bolstering overall market conditions.
However, as the landscape for broad-based ETFs becomes increasingly competitive, with major firms commanding significant market shares, it is imperative for fund companies to consider strategies that include product differentiation, focusing on niche markets, enhancing ETF liquidity, and lowering fees. Emphasizing innovative broad-based indices and adopting unique competitive strategies could be key to improving their market positioning.