China's ETF market sees ‘explosive' growth, inflows jump 5-fold in three years, Morningstar says

• Chinese exchange-traded funds saw a stunning growth in the last three years, with inflows consistently notching new highs, according to Morningstar.
• By the end of last year, the total assets under management (AUM) of ETFs in China more than doubled that of 2020's figure to hit 1.82 trillion yuan.
• The broader China A-shares market has been "tepid" since 2022, with bright spots only in certain niche industries, Morningstar observed.

Chinese exchange-traded funds saw a "staggering" growth in the last five years, with inflows consistently notching new highs, according to Morningstar.

"Annual inflows to China ETFs surged almost fivefold over the past three years," Morningstar's Research Manager Wanda Wang said in a June report. 

According to data provided by the American financial services firm, total yearly inflows to Chinese ETFs swelled from 127.2 billion Chinese yuan ($17.49 billion) in 2021, to 387.2 billion yuan in 2022. In 2023, this figure hit 604.3 billion yuan.

By the end of last year, the total assets under management (AUM) of ETFs in China more than doubled that at the end of 2020, and hit 1.82 trillion yuan.

"Between 2018 and 2023, the annual assets under management growth rate of ETFs in China averaged a staggering 40%, and the total AUM reached record highs every year," the Morningstar report said.

The broader China A-shares market has been "tepid" since 2022, with bright spots only in certain niche industries, the financial services firm said.

"The growth of the Chinese ETF market over the past few years is explosive," Wang told CNBC.

Against this backdrop, it became challenging for actively managed funds to outperform, helping propel China's ETF market and doubling the total AUM to 2 trillion yuan in less than three years.

"The influx of investments by institutional investors have been into broad-based index-tracking ETFs, which is the most important part of the rapid inflows of ETFs in China," Wang added.

'Immense traction' for equity ETFs

Equity products in particular gained "immense traction" in the last three years, making up an overwhelming 96% of the total 870 ETFs in China by the end of 2023. 

Inflows and annual AUM of China's equity ETFs also hit record highs, Wang wrote. Annual inflows in 2023 alone came up to 575.6 billion yuan, which exceeded the total inflows between 2019 to 2022.

Additionally, on the back of a booming semiconductor sector, large amounts of assets were directed into Morningstar's so-called sector equity tech and communications category, Wang added. 

Conversely, there were net outflows in the sector equity financial and real estate category, the report showed.

Fixed income ETFs, which make up 4% of total ETFs, developed more slowly in terms of product launches and AUM growth. Commodities ETFs, which were largely gold ETFs, accounted for under 2%.

Morningstar noted that the ETF market in China tends to be concentrated in leading providers like China Asset Management, E Fund Management and Huatai-PineBridge, which are the three largest ETF providers by AUM.

— CNBC's Evelyn Cheng contributed to this report.