Speaker 1: Welcome now trillions.
Speaker 2: I'm Joel Webber and I'm Eric Balchunas.
Speaker 1: Eric, there has been a huge change at the Japan
Speaker 1: Central Bank, which Japan it was the last country that
Speaker 1: had negative rates and a week ago now they shuddered
Speaker 1: that and have basically said that they're joining the rest
Speaker 1: of the world and having positive interest rates. That has
Speaker 1: enormous implications not only for Japan and Japan's economy, but
Speaker 1: also perhaps the rest of the region in the world.
Speaker 2: Yeah, no doubt. You know, one time, I remember looking
Speaker 2: at the biggest owners of ETFs in the world, and
Speaker 2: because we were really trying to find like how big
Speaker 2: is the Merrill Lynch model, how big is the black
Speaker 2: Rock model? And above all of them was Bank of Japan.
Speaker 2: I forget it was a couple hundred billion dollars worth
Speaker 2: of ETFs.
Speaker 1: It's up to half a trillion dollars now of medfs.
Speaker 2: I mean they and they owned like seven eighty percent
Speaker 2: of all the market. It's really wild. It's almost feels
Speaker 2: a little like socialism where the bank owns all the stocks.
Speaker 2: And that was an interesting story for a long time. Again,
Speaker 2: as someone in the US, only a couple international stories
Speaker 2: get my interest in the year, but that one definitely did.
Speaker 1: But now that they're changing this interest rate policy, they're
Speaker 1: also going to stop buying ETFs. What happens with this
Speaker 1: massive horde of ETFs is a big TBD. But what
Speaker 1: really caught my eye was that and this was Rebecca
Speaker 1: Sen your college at Bloomberg Intelligence in Hong Kong, who
Speaker 1: wrote that China has looked at Japan and basically said,
Speaker 1: we want to get in this ETF game now too, Joel.
Speaker 2: I remember being in the Philadelphia International Airport, I don't know,
Speaker 2: three or four weeks ago, waiting for a flight, eating
Speaker 2: breakfast at Button Maryland's, which is a great place, and
Speaker 2: I got an ib from Rebecca talking about China and
Speaker 2: I was like, wait a second, China's buying ETFs and
Speaker 2: I didn't know this. And then we started looking at
Speaker 2: the investors they are all coming to the US and
Speaker 2: how they're trying to save people from leaving, and I
Speaker 2: was like, Holy moly, this is a massive story. This
Speaker 2: is really something. Does it help China's market go up
Speaker 2: because it's in the gutter. How much do they buy?
Speaker 2: Do they go on Boj's level. It's a one of
Speaker 2: the biggest ETF Stories of the Year, No Doubt.
Speaker 1: And joining us on this episode Rebecca Sen, who's an
Speaker 1: analyst with Bloomberg Intelligence. She's also about to launch her
Speaker 1: own podcast here called Tiger Money in April, this time
Speaker 1: on Trillions Why central banks love ETFs. Rebecca, welcome back
Speaker 1: to Trillions.
Speaker 3: Thank you for having me.
Speaker 1: Okay, Rebecca, I want to start with Japan because for
Speaker 1: years now they've been buying ETFs. How has that gone
Speaker 1: and why have they been buying them?
Speaker 3: So the background for those that may not know is
Speaker 3: that this is the first time that Japan has had
Speaker 3: a rate hype in seventeen years. So think of that
Speaker 3: seventeen years where they've either been in negative or zero
Speaker 3: interest rate. And so the Bank of Japan started buying
Speaker 3: ETFs in twenty ten and the reason why they did
Speaker 3: this was ultimately to support the market. And what some
Speaker 3: may not know is that the market, so the nik
Speaker 3: rallied as much as fifty seven percent in twenty thirteen,
Speaker 3: and ultimately they've amassed a huge position of ETFs, roughly
Speaker 3: four hundred and seventy five billion dollars worth of ETFs,
Speaker 3: and so this is roughly eighty to eighty five percent
Speaker 3: of the ETF market in Japan. But to put that
Speaker 3: into perspective, it's only about seven percent of the entire
Speaker 3: Japanese stock market, so it's not that big. But they've
Speaker 3: ultimately finally said that now they're not going to buy
Speaker 3: any more ETFs. So this is the first time in
Speaker 3: fourteen years.
Speaker 2: Okay, so they have this massive pile of ETFs. I
Speaker 2: believe the Japanese stock market did hit all time highs.
Speaker 2: My friend and colleague Todd Son at Strategists pointed out
Speaker 2: that the last time Japan hit all time high, Michael
Speaker 2: heat And played Batman, and now he's playing Batman again,
Speaker 2: So I don't know if that is correlated or causation, but.
Speaker 1: I'm going to go with correlation.
Speaker 2: Are they going to sell the ETFs now or just
Speaker 2: live with all of this on their balance sheet?
Speaker 3: So they really have three options. The one is sell
Speaker 3: the ETFs, but ultimately that's going to create a huge
Speaker 3: shockwave to the market and drag the market down, so
Speaker 3: no one expects that to happen. Another option is that
Speaker 3: they could potentially hold the ETF forever. Ultimately, the ETF
Speaker 3: is paying dividend, which is a big part of the
Speaker 3: central bank's earning. I think the most likely scenario is
Speaker 3: that they pause, so they do nothing and they try
Speaker 3: and sell the position over several years, if not decades,
Speaker 3: and so I think everyone expects that to be the
Speaker 3: likely scenario. They do have a few other interesting ideas
Speaker 3: that their advisors have suggested, and one of them is
Speaker 3: that the government could take over the ETF and issue
Speaker 3: a perpetual bond to the BOJ to move it off
Speaker 3: its balance sheet. Another one which I thought was interesting,
Speaker 3: someone had suggested gifting ETFs to young adults to help
Speaker 3: boost security ownership. So, for instance, when everyone becomes an adult,
Speaker 3: by default they get an ETF, And I was like, oh,
Speaker 3: that's quite an interesting and I don't think any economy
Speaker 3: has done that. But I think ultimately the expectation is
Speaker 3: that they're going to do nothing, pause, not by anymore,
Speaker 3: and then in hopes of over the next decade, start
Speaker 3: selling off these ETFs.
Speaker 1: We're at this little bit of a wait and see
Speaker 1: moment with Japan, while Japan also has this huge pivot
Speaker 1: with their interest rate policy and leaving this negative interest
Speaker 1: rate moment behind. What I was really curious about, of course,
Speaker 1: is China. So has China just quietly been watching Japan
Speaker 1: for all these years and wondering if this is some
Speaker 1: textbook maneuver that they might be able to do a
Speaker 1: copy and paste exercise with.
Speaker 3: I think China has had a struggle in the economy.
Speaker 3: Last year, the CSI three hundred, which is equivalent to
Speaker 3: the S and P five hundred, was down fifteen percent,
Speaker 3: and I think one of the ideas that was proposed
Speaker 3: was perhaps buying ETFs like Japan in terms of scale.
Speaker 3: In terms of assets under management, Japan ranks first in
Speaker 3: Asia Pacific with roughly five hundred and fifty billion dollars
Speaker 3: worth in Japan and sorry, China is second with roughly
Speaker 3: three hundred and fifty and so perhaps they thought that
Speaker 3: maybe to boost their assets under management, that they could
Speaker 3: start buying ETFs. But what's been interesting this year was
Speaker 3: how much they bought and how quickly. So, to put
Speaker 3: it in perspective, year to date, the Central Bank, also
Speaker 3: known as the China National Team, which is a sovereign
Speaker 3: wealth fund of China, has bought roughly forty five billion
Speaker 3: dollars worth of ETFs, And to put this into perspective,
Speaker 3: just last year China on shore only got about seventy
Speaker 3: billion dollars in assets, so this is half the amount
Speaker 3: in only three months. Three years ago, China only had
Speaker 3: four billion in net new assets, so this is a
Speaker 3: huge amount. In our expectation is they can buy as
Speaker 3: much as one hundred billion dollars by year end, so
Speaker 3: this would be roughly a third of the tire market,
Speaker 3: which is a huge amount in a very short time.
Speaker 2: Joel, let me go over forty five billion in terms
Speaker 2: of their market, that would be like the FED buying
Speaker 2: eight hundred and fifty five billion dollars worth of vtfs here.
Speaker 2: I mean, that is no joke. That's a lot of money.
Speaker 1: It's a lot, and it's also I mean, it's bigger
Speaker 1: than Japan, right, which had been doing this for a decade.
Speaker 2: And it's interesting that a lot of investors like to say,
Speaker 2: don't fight the FED, especially if they're doing asset purchases.
Speaker 2: I don't even know how many people know the China
Speaker 2: national team is doing basically what the FED was doing
Speaker 2: for the past fifteen years. But like on steroids, it'll
Speaker 2: be interesting to see if the market goes up, because
Speaker 2: just that act alone might attract people to buy into it,
Speaker 2: being like, hey, I'm gonna not fight the Instead of
Speaker 2: not fight the FED, I'm going to not fight the
Speaker 2: Chinese national team and make money on this, like it
Speaker 2: should work, right.
Speaker 1: Well, it worked in Japan, right, but they also work
Speaker 1: they were also patient about it, Rebecca, what's the how
Speaker 1: do market participants feel about this, because it's not that
Speaker 1: japan decision wasn't controversial.
Speaker 3: So what happened was when the national team started buying
Speaker 3: ETF they bought the CSI three hundred, and this didn't
Speaker 3: really have much impact on the market. And one of
Speaker 3: the reasons was potentially that a lot of the companies
Speaker 3: in the CSI three hundred are state owned, so it's
Speaker 3: already owned by the government, and so it didn't really
Speaker 3: have much impact. So what they actually started doing was
Speaker 3: started diversifying away from the CSI three hundred and started
Speaker 3: investing into small cap and once they started doing that,
Speaker 3: the market did rally. So, for instance, on there was
Speaker 3: one day where they bought into the small cap ETFs
Speaker 3: and then all of a sudden, the market rallied eleven percent.
Speaker 3: So I think that it is working, but they they
Speaker 3: need to be more selective on the types of ETFs
Speaker 3: that they did. So China actually bought. The National Team
Speaker 3: bought ETFs in twenty fifteen, and what they did back
Speaker 3: then was that they only bought to the largest etf issuers,
Speaker 3: and ultimately that didn't benefit the whole market. So what
Speaker 3: they're doing this time is they're having a more equal
Speaker 3: distribution to all the etf issuers based on their size
Speaker 3: of assets under management, so that everyone in Essen gets
Speaker 3: a pizza piece of the pie.
Speaker 2: You know, that's interesting. Remember in COVID twenty twenty when
Speaker 2: the FED slipped in to buy bond ETFs. When they
Speaker 2: decided what to buy, they bought based on the percentage
Speaker 2: the issuer had a market share. So in fixed income
Speaker 2: Blackrock has fifty percent, then Vanguard has probably a quarter,
Speaker 2: and then down the line and their portfolio really reflected.
Speaker 2: That was also good is they bought bond ETFs that
Speaker 2: didn't just own the same bonds over and over. They
Speaker 2: did go down into different areas. So it is interesting
Speaker 2: to see how the central bank size up the market
Speaker 2: and how to make an impact. I also remember writing
Speaker 2: a story back I don't know, six seven, maybe ten
Speaker 2: years ago, I don't know, times Flying Rebecca about how
Speaker 2: the Bank of Japan it had the same issue was
Speaker 2: buying the large caps, and it thought to itself, we
Speaker 2: should actually be buying companies that spend the most money
Speaker 2: on CAPEX and R and D, and so they had
Speaker 2: I shares create these human capital ETFs. That way the
Speaker 2: money would get passed through to the real economy as
Speaker 2: opposed to just making its way into like dividends in
Speaker 2: like people who own stocks pockets, which is part of
Speaker 2: the issue with the FED. They said, okay, you're looking
Speaker 2: up the stock market, but that's just making the rich
Speaker 2: people richer. How does that actually help the actual economy?
Speaker 2: And I don't know, it's interesting to see them like
Speaker 2: learn as they go.
Speaker 3: So off the back of that. In Japan, when they
Speaker 3: first started doing this ETF purchase, they were purchasing NIK
Speaker 3: two to five. But to your point, it wasn't really
Speaker 3: helping the market or not enough, and so they started
Speaker 3: diversifying and instead of going to NIK, they started going
Speaker 3: to Topics because Topics was a more fair representation of
Speaker 3: the entire market. And so I think in China now
Speaker 3: we're seeing the same thing. They initially started with CSI
Speaker 3: three hundred, which is the large cap company, and now
Speaker 3: they're going to all the small caps and so I
Speaker 3: think central banks are learning from past mistakes. This time
Speaker 3: they're improving. They're going to all ETF issuers. They're trying
Speaker 3: to diversify to not just one index, but multiple index
Speaker 3: So I think it's interesting to watch and see what
Speaker 3: they do and where they invest in two.
Speaker 1: So, if China's national team keeps us up, Rebecca, they
Speaker 1: go from forty five billion of ownership currently to let's
Speaker 1: say one hundred billion by the end of the year,
Speaker 1: what are they looking for? How will they know that
Speaker 1: they've succeeded.
Speaker 3: I think ultimately they're looking to stabilize the market, because
Speaker 3: what was happening was that Chinese investors were being burned
Speaker 3: by Chinese equities. They were not performing, and so they
Speaker 3: were fleeing to ETFs listed in China with foreign exposure,
Speaker 3: so likes of S and P five hundred, MSCIUSA, Nike,
Speaker 3: and some of these ETFs started training at a forty
Speaker 3: three percent premium. And so when Eric heard about this,
Speaker 3: he's what ETFs are trading out of forty three percent
Speaker 3: premium and people are still buying into it. He was shocked.
Speaker 3: And in China, what happens is if the ETF trades
Speaker 3: at a ten percent premium. There's what's called a premium warning.
Speaker 3: It's warning to investors that this ETF is trading at
Speaker 3: a premium, and it gets halted during the first hour
Speaker 3: of trading. And what we noticed was that the ETFs
Speaker 3: that had the most halt got the most inflows. And
Speaker 3: in China there's a QT system, which is qualified Domestic
Speaker 3: Institutional investor, and this is the quota that goes into
Speaker 3: foreign stocks. And what was happening was all of these
Speaker 3: fundhouses their quota was being reached because retailed investors were
Speaker 3: investing into s and P five hundred MSCIUSA, Nike, and
Speaker 3: so these ETFs not only couldn't create, but their trading
Speaker 3: was halted and they had a huge demand. And so
Speaker 3: there were in essence, trying to solve this problem. And
Speaker 3: so they said, look, we're trying. We know people are
Speaker 3: going overseas, people are looking for better returns. Let's start
Speaker 3: investing in our own economy and see if this will
Speaker 3: boost the market. And so this is really why they started,
Speaker 3: i think, potentially investing into ETF's listed in China.
Speaker 2: Yeah, that this part of the story really intrigues me
Speaker 2: because you've got all these Chinese investors, and there's a
Speaker 2: lot of them, and their market is in the gutter,
Speaker 2: and they're trying to say for retirement, and they can
Speaker 2: see the US just going crazy every year, the cues
Speaker 2: just crushing it and crushing it, and they're getting this
Speaker 2: fomo understandably, but they can't really get over here. And
Speaker 2: because of the quota and the Chinese government, they have
Speaker 2: to pay this premium. And so not only are they
Speaker 2: buying into the US market which is at all time highs,
Speaker 2: they're buying into it at thirty forty percent premium on
Speaker 2: top of that, and they're leaving a market that's like
Speaker 2: in the gutter. This just feels like it's going to
Speaker 2: end in tears, Rebecca, Like it's almost like you could
Speaker 2: just sense the timing is bad. You're supposed to buy
Speaker 2: low and sell high. They are buying really high and
Speaker 2: selling really low. Am I wrong? Yeah?
Speaker 3: So I think that's why the national team has stepped in,
Speaker 3: because ultimately they want the retail investors to invest in
Speaker 3: their own market. And an interesting stat about the China
Speaker 3: market is that it's roughly seventy seventy five percent retail,
Speaker 3: so institutions really don't play that much and it's only
Speaker 3: really this year that we've seen institution increase because of
Speaker 3: the China national team. So from retail perspective, yes, they're
Speaker 3: being burned because they didn't make money on China. Now
Speaker 3: they're going into the US market and all time high
Speaker 3: plus the premium, and so there's definitely a lot of
Speaker 3: cautious caution needed for these investors.
Speaker 2: Give us a rundown here. So the Chinese market has
Speaker 2: the central bank buying in and the Bank of Japan
Speaker 2: has stopped. So where do these two countries sit on
Speaker 2: like the top ten list by ETF assets in Asian countries?
Speaker 2: And do you think we'll see like China overtake Japan.
Speaker 3: So I do think that China could potentially overtake Japan
Speaker 3: as quickly as two years. And the reason for that
Speaker 3: is in terms of assets under managed, Japan ranks number
Speaker 3: one with roughly six hundred billion in assets under management.
Speaker 3: But Japan has actually slowed down significantly in recent years.
Speaker 3: And so with the Bank of Japan not buying ETF,
Speaker 3: they really have to grow the market organically, and that's
Speaker 3: why in Japan they launched this new program called the
Speaker 3: NIPO Individual Savings Account, which is a tax free stock
Speaker 3: investment group aimed for investors to really invest into the market.
Speaker 3: So it's kind of like your four oh one K
Speaker 3: in the US where there's tax free, when you can
Speaker 3: purchase ETFs tax free. And so I think mainland China
Speaker 3: could surpass Japan as quickly as two years in terms
Speaker 3: of assets under management and become number one. This could
Speaker 3: even go as quickly as one year if the national
Speaker 3: team keeps buying at the rate that they're buying at.
Speaker 3: So it'll be interesting to see who is number one
Speaker 3: in the next few years.
Speaker 2: And let me have you question, Like say I went
Speaker 2: into China and I walked one thousand miles through the country,
Speaker 2: and I asked everybody that I came in contact with,
Speaker 2: do you know what an ETF is? What percentage of
Speaker 2: the people would say yes.
Speaker 3: I would say most people don't know what it is
Speaker 3: because in China a lot of the way the main
Speaker 3: way that people invest is through their mobile phone, and
Speaker 3: so it's through these mobile payment apps like Alipay and
Speaker 3: we Pay that people can invest in. Most of these
Speaker 3: products are money market funds, and so I'd say ETF
Speaker 3: is still relatively new and there's still a lot of
Speaker 3: education to be done. But the other challenge that China
Speaker 3: faces is they have more than seventy etf issuers, and
Speaker 3: so from a marketing perspective, it's very hard to compete
Speaker 3: against because when you launch one product there's no unique feature,
Speaker 3: you usually have ten to fifteen etf issuers launching the
Speaker 3: exact same product at the exact same time. So think
Speaker 3: of your Bitcoin ETF having eleven etf issuers launch at
Speaker 3: the same time, happening for almost every single launch. The
Speaker 3: competition is fierce, and so in terms of brand recognition,
Speaker 3: it's a muddy place, very difficult. It's a very competitive landscape.
Speaker 1: I'm curious if we take Eric's thousand mile journey through
Speaker 1: the countryside and ask the same thing in Japan, would
Speaker 1: there be much of a difference.
Speaker 3: I would think that Japan you'd probably have more people
Speaker 3: that know about it because Japan's had ETF since nineteen
Speaker 3: ninety five. Mainland China only started ETFs in two thousand
Speaker 3: and four, and so the time difference I think does help.
Speaker 3: And Bank of Japan has been buying ETFs for fourteen.
Speaker 1: Years and so the headline news for a while.
Speaker 3: Know about it, and the thing is in Japan they
Speaker 3: launched this NISSA program which is aimed at individual saving asccount,
Speaker 3: so that means that they have sufficient retail demand to
Speaker 3: know what this is. While in China, I think if
Speaker 3: Eric were to walk one thousand miles in I would
Speaker 3: say fifty percent would not at least fifty percent would
Speaker 3: not know what an ETF is.
Speaker 2: I would walk one thousand miles to see if anyone
Speaker 2: knows about ETFs.
Speaker 1: Okay, Rebecca, this was a fascinating comparison between Japan and China.
Speaker 1: What else, as we wrap here, what else should our
Speaker 1: listeners know about ETFs? In Asia?
Speaker 3: Hong Kong is going to launch the first spot bitcoin
Speaker 3: and we could see the first launch as early as May.
Speaker 3: And what's interesting about this is Hong Kong's going to
Speaker 3: take in kind creation and so bitcoin in ETF out
Speaker 3: and so this could be groundbreaking for Asia. Given the
Speaker 3: success of the US with a spot bigcoin ETF. This
Speaker 3: is a very interesting space that we're watching very closely.
Speaker 2: Apparently in the US the SEC didn't want to do
Speaker 2: in kin creations and redemptions because they thought that bad
Speaker 2: people would use the ETF to launder money, but they
Speaker 2: might go to Hong Kong.
Speaker 1: To do it.
Speaker 3: I'd say everyone should watch out for Asia Pacific right now,
Speaker 3: because we currently have as of December twenty twenty three,
Speaker 3: one point five trillion dollars in assets, and we may
Speaker 3: very well, very quickly surpass Europe in terms of assets
Speaker 3: under management, especially with the rate of where mainland China
Speaker 3: is growing, the growth in India, Taiwan, ETF. Assets in
Speaker 3: Asia Pacific can surpass Europe as quickly as two years.
Speaker 3: So watch out.
Speaker 1: Sound wowow it sounds like a bet Olbi team.
Speaker 2: I agree, by the way, that should be a note.
Speaker 2: You should definitely write that Asia is going to pass
Speaker 2: Europe in two years something like that. That's how we
Speaker 2: think of notes on the team. Right there, you just
Speaker 2: had a little insight schul you want which I think
Speaker 2: it's enough.
Speaker 1: It's enough.
Speaker 2: I get it.
Speaker 1: Rebecca. Thanks for joining us on Trillions.
Speaker 3: Thank you for having me.
Speaker 1: Thanks for listening to Trillions. Until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: or wherever else you'd like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter. I'm at Joel Webber Show.
Speaker 1: He's at Eric Baltunas. This episode of Trillions was produced
Speaker 1: by Magnus Hendrickson Bye