Fund Market Overview

Overview of Shanghai Stock Exchange Fund Market Development

I History of SSE's Fund Market

Shanghai Stock Exchange's development strategy is to build " multi-tiered market system with the blue-chip market as the core and coordinated development of bond market, fund market and derivatives market", of which fund market is an important component. SSE's Fund market started in 1998 and its development can be broadly divided into three phases:

1. The Initial Phase (1998-2004): In March 1998, the issuance of Jintai and Kaiyuan in the SSE and the Shenzhen Stock Exchange opened a new chapter in the development of China's securities investment fund industry. After two years of rapid growth, due to the gloomy market, high discount rate and opaque operation, among other factors, closed-ended fund issuance was basically stagnant.

2. Consolidation and Growth Phase (2005-2008): In 2005, the SSE launched the first ETF product in China - SSE 50ETF. Its operation combined the advantages of closed-ended funds and open-end funds, and was hugely popular in the market.

Based on the optimization of ETF operation mechanism and investor education, the SSE rolled out SSE180 ETF and SSE Dividend ETF. At the same time, to support the development of an open-end fund industry, the SSE introduced "SSE FundTrade" which provided subscription and redemption services for open-end funds. Since then, the number of listed funds and subscription and redemption volume rose steadily.

3. Rapid Development Phase (2009-2011): After several years of market cultivation, since 2009 the SSE witnessed rapid growth in exchange–traded fund market led by ETFs. In 2011, the number of ETFs listed in the SSE jumped from 3 to 24, with an average annual growth of 100%. The asset scale increased by 80% annually on average and the trading volume also ballooned. The proportion of ETFs among public funds continued to rise from 1.18% to 3.52%. The SSE is a leader in product innovation, launching of China’s first theme ETF, the first sector ETF and the first style ETF. The SSE has formed a complete product portfolio in the single market stock ETF.

Besides the general advantages of ETFs such as low costs, high transparency and small tracking error, the operation of ETFs in China adopts a real-time subscription and redemption mode which is based on the feature of domestic securities accounts and depository system. Investors can exchange between ETF shares and a basket of stocks instantly through the exchange's trading system, which greatly improves investors' efficiency of arbitrage and fund operation. Given that the market infrastructure such as margin trading and market making is not yet fully developed, this mode ensures that SSE-listed ETF's tracking error, day premiums/discounts and other operational performance indicators rank high in the global market. Meanwhile, the SSE releases real-time subscription and redemption list and IOPV to market participants through the exchange’s trading system, so that market participants can access information fairly and timely, which in turn increases the transparency of ETFs.

II Comprehensive Development from 2012

In 2012, the SSE adjusted strategic planning of the fund market and adopted a series of reforms such as releasing index authorization, optimizing operation mechanism and introducing liquidity providers. As a result, fund market put on a new look in product innovation. In the same time, remarkable improvements in product development, services, fund products trading mechanism and risk control took the fund market into the fast lane of development and innovation.

By the end of December, a total of 16 products got CSRC's approval (and another 8 are under review), covering 5 major categories of innovative products. In the same time, product variety was expanded, leading to a more diversified product structure.

1. The successful listing of cross-market ETF. On May 28, the SSE's first cross-market ETF (CSI 300ETF) was successfully listed, with a funding of about RMB 33 billion, much larger than that of similar products in the Shenzhen Stock Exchange. Compared to SZSE 300 ETF, the operation mode of SSE 300 ETF balances both efficiency and risk control requirements, with an average daily trading volume four times of that of SZSE 300 ETF. Its premium/discount rate and margin indicators also fare much better than the Shenzhen counterpart.

2. Cross-border ETF has been listed. The first cross-border ETF of the SSE (Hang Seng H-Share ETF) got listed on October 22. H-Share ETFs and their linked funds raised 4.855 billion RMB, slightly over the size of similar products on the Shenzhen Stock Exchange. The business of H-Share ETF went on smoothly, closing at a simulated net worth of 1.019 RMB on the first day of listing, 1 percentage point higher than Hang Seng ETF (1.009 RMB) on the Shenzhen Stock Exchange.

3. Exchange Money Market Fund has been launched. China's first real-time purchase and redemption business of Exchange Money Market Fund and first Exchange-traded Money Market Fund were approved in October and December and issued in December.
 
4. Sector ETF has been approved. After new regulations for raising sponsored fund were implemented, China's first Sector ETF, covering five sectors, has been approved and is now in the pipeline for issuing. It is managed by China AMC and is to be listed on the Shanghai Stock Exchange.

5. Breakthroughs have been made in bond ETF and gold ETF. After thorough deliberation, the proposal for the first cross-market bond ETF and gold ETF has been accepted by the regulatory body and is now being processed.

6. SSE LOF business proposal has been ratified and technical implementation is underway. There had been repeated study and deliberation on the LOF proposal this year before it was ratified. The SSE technology departments have kicked off technology development, expecting it to be launched in the first half of next year.

By the end of 2012, the SSE has listed 29 ETFs, managing 69.4 billion RMB worth of funds. Compared to 2011, the size of ETFs has grown by 26%, the market value of listed funds by 44% (the market value of ETFs by 69%), and the turnover value of ETFs by 8%. In turnover volume, China's ETF market is a major player in Asia and is rated among the world's top ten. The underlyings range across a full spectrum of size indices, covering super-large cap, large cap, medium cap, and small-and-medium cap. Thematic ETF, style ETF, Sector ETF and cross-border ETF are catching on. Bond ETF, gold ETF, and leveraged ETF are advancing steadily.

III Development Plan of SSE Fund Market in the Next Few Years

In face of the imminent comprehensive transitional period of the fund sector, the next few years will be pivotal for the rapid development of the SSE fund market. According to our development strategy, the SSE fund market will be large in size, cover equities, bonds, commodities and derivatives, connect the exchange market and the OTC market, and transcend national boundaries. It will be a hub for investors to allocate a spectrum of assets in an efficient, convenient, and secure manner, connecting sectors and corners throughout the world on par with the equity and the bond market. To this end, we have formulated the short and medium-term development plan: by 2013, over 100 funds are expected to have been listed, with over one million fund investors. These two figures are expected to be doubled both in 2014 and 2015, so that almost 1000 funds will have been listed by 2016, with nearly 10 million fund investors.

To attain these goals, our fundamental approach will be providing professional and efficient service for fund companies and investors. We will start with developing products, building platforms, and promoting products, in order to secure the leapfrog development of the fund market.

Appendix I Historical data of ETF Market

  Year-end number of funds Annual turnover value
(in hundred million RMB)
Year-end market value
(in hundred million RMB)
2005 1 421 65
2006 2 247 56
2007 3 1198 149
2008 3 2739 188
2009 5 5759 409
2010 12 4202 481
2011 23 2699 425
2012 29 2958 694
Note: Data as of December 31, 2012