2013: The year of the Chinese ETF?

For the past few months at least, China has been driving the exchange-traded funds (ETF) bus. That’s according to a raft of new data on ETF flows for 2012. As investors shifted to a risk-on mood at the end of the year, China was a huge part of the story. Demand for exposure to Chinese equities helped push emerging market equity fund inflows to a record $27.1 billion according to BlackRock. Data shows inflows into China-focused exchange-traded products tripled in the last quarter of 2012, rising to $12.2 billion as investors responded positively to China’s elections and the possibility that new leadership could just kickstart growth. In all, it was a positive end to a year marked by stories about empty Chinese ghost malls and political scandals.

But while China battled negative headlines last year, it was in many ways a game changer in the ETF world—a trend that looks as if it will continue in 2013. China’s interesting relationship with ETFs started last fall when its policymakers went in the opposite direction of many developed market governments and gave ETFs a serious boost. As regulators in the U.S. and Europe turned the heat up on ETFs, the Chinese government gave them a big vote of confidence, launching two yuan-dominated ETFs tracking Hong Kong stocks that would give mainland investors their first chance ever to trade shares in the former British colony. ETFs were the pillar of Beijing’s first big step to liberalize what has always been a tightly controlled financial sector—not bonds, not mutual funds…ETFs. It was a good day for the asset class.