WEBVTT - Why Central Banks Love ETFs

0:00:07.160 --> 0:00:08.000
<v Speaker 1>Welcome now trillions.

0:00:08.080 --> 0:00:10.479
<v Speaker 2>I'm Joel Webber and I'm Eric Balchunas.

0:00:12.880 --> 0:00:17.200
<v Speaker 1>Eric, there has been a huge change at the Japan

0:00:17.520 --> 0:00:20.600
<v Speaker 1>Central Bank, which Japan it was the last country that

0:00:20.720 --> 0:00:25.840
<v Speaker 1>had negative rates and a week ago now they shuddered

0:00:25.880 --> 0:00:29.120
<v Speaker 1>that and have basically said that they're joining the rest

0:00:29.200 --> 0:00:32.280
<v Speaker 1>of the world and having positive interest rates. That has

0:00:32.440 --> 0:00:36.280
<v Speaker 1>enormous implications not only for Japan and Japan's economy, but

0:00:36.320 --> 0:00:38.440
<v Speaker 1>also perhaps the rest of the region in the world.

0:00:38.520 --> 0:00:40.800
<v Speaker 2>Yeah, no doubt. You know, one time, I remember looking

0:00:40.840 --> 0:00:43.479
<v Speaker 2>at the biggest owners of ETFs in the world, and

0:00:43.560 --> 0:00:45.160
<v Speaker 2>because we were really trying to find like how big

0:00:45.200 --> 0:00:47.000
<v Speaker 2>is the Merrill Lynch model, how big is the black

0:00:47.080 --> 0:00:50.200
<v Speaker 2>Rock model? And above all of them was Bank of Japan.

0:00:50.640 --> 0:00:53.120
<v Speaker 2>I forget it was a couple hundred billion dollars worth

0:00:53.159 --> 0:00:53.720
<v Speaker 2>of ETFs.

0:00:53.800 --> 0:00:57.480
<v Speaker 1>It's up to half a trillion dollars now of medfs.

0:00:58.160 --> 0:01:01.120
<v Speaker 2>I mean they and they owned like seven eighty percent

0:01:01.160 --> 0:01:04.039
<v Speaker 2>of all the market. It's really wild. It's almost feels

0:01:04.040 --> 0:01:07.399
<v Speaker 2>a little like socialism where the bank owns all the stocks.

0:01:07.959 --> 0:01:10.760
<v Speaker 2>And that was an interesting story for a long time. Again,

0:01:10.840 --> 0:01:14.600
<v Speaker 2>as someone in the US, only a couple international stories

0:01:14.640 --> 0:01:16.600
<v Speaker 2>get my interest in the year, but that one definitely did.

0:01:16.720 --> 0:01:20.440
<v Speaker 1>But now that they're changing this interest rate policy, they're

0:01:20.440 --> 0:01:24.200
<v Speaker 1>also going to stop buying ETFs. What happens with this

0:01:24.400 --> 0:01:28.160
<v Speaker 1>massive horde of ETFs is a big TBD. But what

0:01:28.319 --> 0:01:31.319
<v Speaker 1>really caught my eye was that and this was Rebecca

0:01:31.360 --> 0:01:35.800
<v Speaker 1>Sen your college at Bloomberg Intelligence in Hong Kong, who

0:01:35.959 --> 0:01:39.000
<v Speaker 1>wrote that China has looked at Japan and basically said,

0:01:39.880 --> 0:01:42.720
<v Speaker 1>we want to get in this ETF game now too, Joel.

0:01:42.760 --> 0:01:45.280
<v Speaker 2>I remember being in the Philadelphia International Airport, I don't know,

0:01:45.280 --> 0:01:47.160
<v Speaker 2>three or four weeks ago, waiting for a flight, eating

0:01:47.160 --> 0:01:50.080
<v Speaker 2>breakfast at Button Maryland's, which is a great place, and

0:01:50.640 --> 0:01:53.360
<v Speaker 2>I got an ib from Rebecca talking about China and

0:01:54.280 --> 0:01:57.240
<v Speaker 2>I was like, wait a second, China's buying ETFs and

0:01:57.320 --> 0:01:59.760
<v Speaker 2>I didn't know this. And then we started looking at

0:01:59.840 --> 0:02:01.760
<v Speaker 2>the investors they are all coming to the US and

0:02:01.760 --> 0:02:04.520
<v Speaker 2>how they're trying to save people from leaving, and I

0:02:04.560 --> 0:02:06.720
<v Speaker 2>was like, Holy moly, this is a massive story. This

0:02:06.840 --> 0:02:11.520
<v Speaker 2>is really something. Does it help China's market go up

0:02:11.560 --> 0:02:14.000
<v Speaker 2>because it's in the gutter. How much do they buy?

0:02:14.000 --> 0:02:16.840
<v Speaker 2>Do they go on Boj's level. It's a one of

0:02:16.840 --> 0:02:19.320
<v Speaker 2>the biggest ETF Stories of the Year, No Doubt.

0:02:19.880 --> 0:02:22.240
<v Speaker 1>And joining us on this episode Rebecca Sen, who's an

0:02:22.280 --> 0:02:26.280
<v Speaker 1>analyst with Bloomberg Intelligence. She's also about to launch her

0:02:26.280 --> 0:02:32.040
<v Speaker 1>own podcast here called Tiger Money in April, this time

0:02:32.040 --> 0:02:39.520
<v Speaker 1>on Trillions Why central banks love ETFs. Rebecca, welcome back

0:02:39.520 --> 0:02:40.239
<v Speaker 1>to Trillions.

0:02:40.800 --> 0:02:41.640
<v Speaker 3>Thank you for having me.

0:02:41.760 --> 0:02:45.600
<v Speaker 1>Okay, Rebecca, I want to start with Japan because for

0:02:46.000 --> 0:02:48.640
<v Speaker 1>years now they've been buying ETFs. How has that gone

0:02:48.639 --> 0:02:51.320
<v Speaker 1>and why have they been buying them?

0:02:51.919 --> 0:02:54.800
<v Speaker 3>So the background for those that may not know is

0:02:54.840 --> 0:02:58.320
<v Speaker 3>that this is the first time that Japan has had

0:02:58.360 --> 0:03:01.760
<v Speaker 3>a rate hype in seventeen years. So think of that

0:03:01.880 --> 0:03:04.880
<v Speaker 3>seventeen years where they've either been in negative or zero

0:03:04.919 --> 0:03:07.840
<v Speaker 3>interest rate. And so the Bank of Japan started buying

0:03:07.880 --> 0:03:10.639
<v Speaker 3>ETFs in twenty ten and the reason why they did

0:03:10.680 --> 0:03:14.080
<v Speaker 3>this was ultimately to support the market. And what some

0:03:14.280 --> 0:03:16.480
<v Speaker 3>may not know is that the market, so the nik

0:03:16.639 --> 0:03:20.160
<v Speaker 3>rallied as much as fifty seven percent in twenty thirteen,

0:03:20.520 --> 0:03:24.160
<v Speaker 3>and ultimately they've amassed a huge position of ETFs, roughly

0:03:24.240 --> 0:03:27.240
<v Speaker 3>four hundred and seventy five billion dollars worth of ETFs,

0:03:27.240 --> 0:03:29.480
<v Speaker 3>and so this is roughly eighty to eighty five percent

0:03:29.480 --> 0:03:32.400
<v Speaker 3>of the ETF market in Japan. But to put that

0:03:32.480 --> 0:03:35.680
<v Speaker 3>into perspective, it's only about seven percent of the entire

0:03:35.800 --> 0:03:38.800
<v Speaker 3>Japanese stock market, so it's not that big. But they've

0:03:38.880 --> 0:03:41.440
<v Speaker 3>ultimately finally said that now they're not going to buy

0:03:41.480 --> 0:03:43.960
<v Speaker 3>any more ETFs. So this is the first time in

0:03:44.080 --> 0:03:44.880
<v Speaker 3>fourteen years.

0:03:46.560 --> 0:03:48.840
<v Speaker 2>Okay, so they have this massive pile of ETFs. I

0:03:48.880 --> 0:03:51.920
<v Speaker 2>believe the Japanese stock market did hit all time highs.

0:03:52.360 --> 0:03:56.839
<v Speaker 2>My friend and colleague Todd Son at Strategists pointed out

0:03:56.840 --> 0:03:59.840
<v Speaker 2>that the last time Japan hit all time high, Michael

0:04:00.000 --> 0:04:02.880
<v Speaker 2>heat And played Batman, and now he's playing Batman again,

0:04:03.440 --> 0:04:06.920
<v Speaker 2>So I don't know if that is correlated or causation, but.

0:04:07.520 --> 0:04:09.520
<v Speaker 1>I'm going to go with correlation.

0:04:10.200 --> 0:04:12.720
<v Speaker 2>Are they going to sell the ETFs now or just

0:04:12.960 --> 0:04:14.960
<v Speaker 2>live with all of this on their balance sheet?

0:04:15.200 --> 0:04:17.280
<v Speaker 3>So they really have three options. The one is sell

0:04:17.320 --> 0:04:19.599
<v Speaker 3>the ETFs, but ultimately that's going to create a huge

0:04:19.600 --> 0:04:22.159
<v Speaker 3>shockwave to the market and drag the market down, so

0:04:22.200 --> 0:04:25.400
<v Speaker 3>no one expects that to happen. Another option is that

0:04:25.440 --> 0:04:28.960
<v Speaker 3>they could potentially hold the ETF forever. Ultimately, the ETF

0:04:29.040 --> 0:04:31.080
<v Speaker 3>is paying dividend, which is a big part of the

0:04:31.120 --> 0:04:34.599
<v Speaker 3>central bank's earning. I think the most likely scenario is

0:04:34.640 --> 0:04:37.479
<v Speaker 3>that they pause, so they do nothing and they try

0:04:37.480 --> 0:04:40.840
<v Speaker 3>and sell the position over several years, if not decades,

0:04:40.920 --> 0:04:42.960
<v Speaker 3>and so I think everyone expects that to be the

0:04:43.120 --> 0:04:47.160
<v Speaker 3>likely scenario. They do have a few other interesting ideas

0:04:47.200 --> 0:04:50.719
<v Speaker 3>that their advisors have suggested, and one of them is

0:04:50.760 --> 0:04:54.320
<v Speaker 3>that the government could take over the ETF and issue

0:04:54.360 --> 0:04:57.120
<v Speaker 3>a perpetual bond to the BOJ to move it off

0:04:57.160 --> 0:04:59.800
<v Speaker 3>its balance sheet. Another one which I thought was interesting,

0:05:00.279 --> 0:05:04.200
<v Speaker 3>someone had suggested gifting ETFs to young adults to help

0:05:04.279 --> 0:05:08.000
<v Speaker 3>boost security ownership. So, for instance, when everyone becomes an adult,

0:05:08.040 --> 0:05:09.880
<v Speaker 3>by default they get an ETF, And I was like, oh,

0:05:09.880 --> 0:05:13.520
<v Speaker 3>that's quite an interesting and I don't think any economy

0:05:13.600 --> 0:05:16.120
<v Speaker 3>has done that. But I think ultimately the expectation is

0:05:16.120 --> 0:05:18.600
<v Speaker 3>that they're going to do nothing, pause, not by anymore,

0:05:18.880 --> 0:05:21.440
<v Speaker 3>and then in hopes of over the next decade, start

0:05:21.520 --> 0:05:22.800
<v Speaker 3>selling off these ETFs.

0:05:23.320 --> 0:05:25.440
<v Speaker 1>We're at this little bit of a wait and see

0:05:25.440 --> 0:05:29.160
<v Speaker 1>moment with Japan, while Japan also has this huge pivot

0:05:29.520 --> 0:05:33.520
<v Speaker 1>with their interest rate policy and leaving this negative interest

0:05:33.600 --> 0:05:37.680
<v Speaker 1>rate moment behind. What I was really curious about, of course,

0:05:37.839 --> 0:05:41.359
<v Speaker 1>is China. So has China just quietly been watching Japan

0:05:41.480 --> 0:05:44.320
<v Speaker 1>for all these years and wondering if this is some

0:05:44.360 --> 0:05:46.880
<v Speaker 1>textbook maneuver that they might be able to do a

0:05:46.920 --> 0:05:48.240
<v Speaker 1>copy and paste exercise with.

0:05:48.680 --> 0:05:52.040
<v Speaker 3>I think China has had a struggle in the economy.

0:05:52.080 --> 0:05:54.440
<v Speaker 3>Last year, the CSI three hundred, which is equivalent to

0:05:54.480 --> 0:05:57.080
<v Speaker 3>the S and P five hundred, was down fifteen percent,

0:05:57.520 --> 0:05:59.720
<v Speaker 3>and I think one of the ideas that was proposed

0:05:59.800 --> 0:06:03.279
<v Speaker 3>was perhaps buying ETFs like Japan in terms of scale.

0:06:03.279 --> 0:06:06.320
<v Speaker 3>In terms of assets under management, Japan ranks first in

0:06:06.360 --> 0:06:10.440
<v Speaker 3>Asia Pacific with roughly five hundred and fifty billion dollars

0:06:10.480 --> 0:06:14.000
<v Speaker 3>worth in Japan and sorry, China is second with roughly

0:06:14.040 --> 0:06:17.080
<v Speaker 3>three hundred and fifty and so perhaps they thought that

0:06:17.120 --> 0:06:20.040
<v Speaker 3>maybe to boost their assets under management, that they could

0:06:20.080 --> 0:06:23.640
<v Speaker 3>start buying ETFs. But what's been interesting this year was

0:06:23.880 --> 0:06:26.560
<v Speaker 3>how much they bought and how quickly. So, to put

0:06:26.560 --> 0:06:29.280
<v Speaker 3>it in perspective, year to date, the Central Bank, also

0:06:29.360 --> 0:06:31.680
<v Speaker 3>known as the China National Team, which is a sovereign

0:06:31.680 --> 0:06:35.599
<v Speaker 3>wealth fund of China, has bought roughly forty five billion

0:06:35.640 --> 0:06:39.480
<v Speaker 3>dollars worth of ETFs, And to put this into perspective,

0:06:39.640 --> 0:06:43.200
<v Speaker 3>just last year China on shore only got about seventy

0:06:43.279 --> 0:06:45.880
<v Speaker 3>billion dollars in assets, so this is half the amount

0:06:46.080 --> 0:06:49.440
<v Speaker 3>in only three months. Three years ago, China only had

0:06:49.520 --> 0:06:52.040
<v Speaker 3>four billion in net new assets, so this is a

0:06:52.120 --> 0:06:55.200
<v Speaker 3>huge amount. In our expectation is they can buy as

0:06:55.279 --> 0:06:58.200
<v Speaker 3>much as one hundred billion dollars by year end, so

0:06:58.279 --> 0:07:00.880
<v Speaker 3>this would be roughly a third of the tire market,

0:07:01.040 --> 0:07:03.039
<v Speaker 3>which is a huge amount in a very short time.

0:07:03.760 --> 0:07:06.880
<v Speaker 2>Joel, let me go over forty five billion in terms

0:07:06.920 --> 0:07:10.320
<v Speaker 2>of their market, that would be like the FED buying

0:07:10.360 --> 0:07:13.120
<v Speaker 2>eight hundred and fifty five billion dollars worth of vtfs here.

0:07:13.440 --> 0:07:16.320
<v Speaker 2>I mean, that is no joke. That's a lot of money.

0:07:16.360 --> 0:07:19.760
<v Speaker 1>It's a lot, and it's also I mean, it's bigger

0:07:20.280 --> 0:07:24.040
<v Speaker 1>than Japan, right, which had been doing this for a decade.

0:07:24.880 --> 0:07:28.440
<v Speaker 2>And it's interesting that a lot of investors like to say,

0:07:28.520 --> 0:07:31.720
<v Speaker 2>don't fight the FED, especially if they're doing asset purchases.

0:07:32.600 --> 0:07:34.880
<v Speaker 2>I don't even know how many people know the China

0:07:35.000 --> 0:07:38.440
<v Speaker 2>national team is doing basically what the FED was doing

0:07:38.480 --> 0:07:42.040
<v Speaker 2>for the past fifteen years. But like on steroids, it'll

0:07:42.080 --> 0:07:44.120
<v Speaker 2>be interesting to see if the market goes up, because

0:07:44.320 --> 0:07:46.680
<v Speaker 2>just that act alone might attract people to buy into it,

0:07:46.720 --> 0:07:49.160
<v Speaker 2>being like, hey, I'm gonna not fight the Instead of

0:07:49.200 --> 0:07:51.360
<v Speaker 2>not fight the FED, I'm going to not fight the

0:07:51.480 --> 0:07:55.760
<v Speaker 2>Chinese national team and make money on this, like it

0:07:55.800 --> 0:07:57.040
<v Speaker 2>should work, right.

0:07:57.400 --> 0:08:00.320
<v Speaker 1>Well, it worked in Japan, right, but they also work

0:08:00.720 --> 0:08:04.720
<v Speaker 1>they were also patient about it, Rebecca, what's the how

0:08:04.720 --> 0:08:08.160
<v Speaker 1>do market participants feel about this, because it's not that

0:08:08.400 --> 0:08:10.920
<v Speaker 1>japan decision wasn't controversial.

0:08:13.440 --> 0:08:16.679
<v Speaker 3>So what happened was when the national team started buying

0:08:16.720 --> 0:08:20.520
<v Speaker 3>ETF they bought the CSI three hundred, and this didn't

0:08:20.560 --> 0:08:23.720
<v Speaker 3>really have much impact on the market. And one of

0:08:23.760 --> 0:08:28.160
<v Speaker 3>the reasons was potentially that a lot of the companies

0:08:28.560 --> 0:08:30.720
<v Speaker 3>in the CSI three hundred are state owned, so it's

0:08:30.720 --> 0:08:32.760
<v Speaker 3>already owned by the government, and so it didn't really

0:08:32.800 --> 0:08:35.680
<v Speaker 3>have much impact. So what they actually started doing was

0:08:35.800 --> 0:08:39.480
<v Speaker 3>started diversifying away from the CSI three hundred and started

0:08:39.520 --> 0:08:42.600
<v Speaker 3>investing into small cap and once they started doing that,

0:08:42.960 --> 0:08:44.880
<v Speaker 3>the market did rally. So, for instance, on there was

0:08:44.880 --> 0:08:47.120
<v Speaker 3>one day where they bought into the small cap ETFs

0:08:47.360 --> 0:08:49.720
<v Speaker 3>and then all of a sudden, the market rallied eleven percent.

0:08:50.080 --> 0:08:53.880
<v Speaker 3>So I think that it is working, but they they

0:08:54.200 --> 0:08:57.199
<v Speaker 3>need to be more selective on the types of ETFs

0:08:57.240 --> 0:09:00.439
<v Speaker 3>that they did. So China actually bought. The National Team

0:09:00.480 --> 0:09:02.960
<v Speaker 3>bought ETFs in twenty fifteen, and what they did back

0:09:03.000 --> 0:09:06.880
<v Speaker 3>then was that they only bought to the largest etf issuers,

0:09:07.120 --> 0:09:09.840
<v Speaker 3>and ultimately that didn't benefit the whole market. So what

0:09:09.840 --> 0:09:12.320
<v Speaker 3>they're doing this time is they're having a more equal

0:09:12.320 --> 0:09:15.760
<v Speaker 3>distribution to all the etf issuers based on their size

0:09:15.800 --> 0:09:18.200
<v Speaker 3>of assets under management, so that everyone in Essen gets

0:09:18.200 --> 0:09:19.640
<v Speaker 3>a pizza piece of the pie.

0:09:19.760 --> 0:09:22.640
<v Speaker 2>You know, that's interesting. Remember in COVID twenty twenty when

0:09:22.679 --> 0:09:25.160
<v Speaker 2>the FED slipped in to buy bond ETFs. When they

0:09:25.200 --> 0:09:29.040
<v Speaker 2>decided what to buy, they bought based on the percentage

0:09:29.440 --> 0:09:31.520
<v Speaker 2>the issuer had a market share. So in fixed income

0:09:31.559 --> 0:09:34.959
<v Speaker 2>Blackrock has fifty percent, then Vanguard has probably a quarter,

0:09:35.400 --> 0:09:38.080
<v Speaker 2>and then down the line and their portfolio really reflected.

0:09:38.080 --> 0:09:41.240
<v Speaker 2>That was also good is they bought bond ETFs that

0:09:41.559 --> 0:09:43.760
<v Speaker 2>didn't just own the same bonds over and over. They

0:09:43.760 --> 0:09:46.960
<v Speaker 2>did go down into different areas. So it is interesting

0:09:47.000 --> 0:09:50.000
<v Speaker 2>to see how the central bank size up the market

0:09:50.080 --> 0:09:52.160
<v Speaker 2>and how to make an impact. I also remember writing

0:09:52.400 --> 0:09:55.840
<v Speaker 2>a story back I don't know, six seven, maybe ten

0:09:55.920 --> 0:09:59.160
<v Speaker 2>years ago, I don't know, times Flying Rebecca about how

0:09:59.160 --> 0:10:01.760
<v Speaker 2>the Bank of Japan it had the same issue was

0:10:01.840 --> 0:10:05.880
<v Speaker 2>buying the large caps, and it thought to itself, we

0:10:05.880 --> 0:10:08.880
<v Speaker 2>should actually be buying companies that spend the most money

0:10:08.880 --> 0:10:12.440
<v Speaker 2>on CAPEX and R and D, and so they had

0:10:12.520 --> 0:10:17.160
<v Speaker 2>I shares create these human capital ETFs. That way the

0:10:17.160 --> 0:10:19.280
<v Speaker 2>money would get passed through to the real economy as

0:10:19.280 --> 0:10:22.200
<v Speaker 2>opposed to just making its way into like dividends in

0:10:22.240 --> 0:10:24.760
<v Speaker 2>like people who own stocks pockets, which is part of

0:10:24.800 --> 0:10:27.400
<v Speaker 2>the issue with the FED. They said, okay, you're looking

0:10:27.440 --> 0:10:29.000
<v Speaker 2>up the stock market, but that's just making the rich

0:10:29.040 --> 0:10:32.040
<v Speaker 2>people richer. How does that actually help the actual economy?

0:10:32.080 --> 0:10:33.920
<v Speaker 2>And I don't know, it's interesting to see them like

0:10:34.000 --> 0:10:34.839
<v Speaker 2>learn as they go.

0:10:35.120 --> 0:10:38.120
<v Speaker 3>So off the back of that. In Japan, when they

0:10:38.160 --> 0:10:40.760
<v Speaker 3>first started doing this ETF purchase, they were purchasing NIK

0:10:40.840 --> 0:10:44.439
<v Speaker 3>two to five. But to your point, it wasn't really

0:10:44.440 --> 0:10:46.360
<v Speaker 3>helping the market or not enough, and so they started

0:10:46.360 --> 0:10:49.280
<v Speaker 3>diversifying and instead of going to NIK, they started going

0:10:49.280 --> 0:10:52.240
<v Speaker 3>to Topics because Topics was a more fair representation of

0:10:52.280 --> 0:10:54.839
<v Speaker 3>the entire market. And so I think in China now

0:10:54.840 --> 0:10:57.120
<v Speaker 3>we're seeing the same thing. They initially started with CSI

0:10:57.120 --> 0:10:59.200
<v Speaker 3>three hundred, which is the large cap company, and now

0:10:59.200 --> 0:11:01.240
<v Speaker 3>they're going to all the small caps and so I

0:11:01.280 --> 0:11:04.719
<v Speaker 3>think central banks are learning from past mistakes. This time

0:11:04.720 --> 0:11:07.439
<v Speaker 3>they're improving. They're going to all ETF issuers. They're trying

0:11:07.440 --> 0:11:10.839
<v Speaker 3>to diversify to not just one index, but multiple index

0:11:10.920 --> 0:11:13.280
<v Speaker 3>So I think it's interesting to watch and see what

0:11:13.320 --> 0:11:14.880
<v Speaker 3>they do and where they invest in two.

0:11:22.160 --> 0:11:25.160
<v Speaker 1>So, if China's national team keeps us up, Rebecca, they

0:11:25.160 --> 0:11:29.360
<v Speaker 1>go from forty five billion of ownership currently to let's

0:11:29.400 --> 0:11:31.320
<v Speaker 1>say one hundred billion by the end of the year,

0:11:31.760 --> 0:11:34.760
<v Speaker 1>what are they looking for? How will they know that

0:11:34.760 --> 0:11:35.600
<v Speaker 1>they've succeeded.

0:11:37.080 --> 0:11:40.000
<v Speaker 3>I think ultimately they're looking to stabilize the market, because

0:11:40.600 --> 0:11:44.880
<v Speaker 3>what was happening was that Chinese investors were being burned

0:11:45.000 --> 0:11:48.160
<v Speaker 3>by Chinese equities. They were not performing, and so they

0:11:48.160 --> 0:11:52.640
<v Speaker 3>were fleeing to ETFs listed in China with foreign exposure,

0:11:52.679 --> 0:11:55.679
<v Speaker 3>so likes of S and P five hundred, MSCIUSA, Nike,

0:11:56.200 --> 0:11:59.480
<v Speaker 3>and some of these ETFs started training at a forty

0:11:59.559 --> 0:12:02.720
<v Speaker 3>three percent premium. And so when Eric heard about this,

0:12:02.800 --> 0:12:05.240
<v Speaker 3>he's what ETFs are trading out of forty three percent

0:12:05.280 --> 0:12:08.240
<v Speaker 3>premium and people are still buying into it. He was shocked.

0:12:08.920 --> 0:12:11.600
<v Speaker 3>And in China, what happens is if the ETF trades

0:12:11.640 --> 0:12:14.960
<v Speaker 3>at a ten percent premium. There's what's called a premium warning.

0:12:15.120 --> 0:12:17.840
<v Speaker 3>It's warning to investors that this ETF is trading at

0:12:17.880 --> 0:12:20.040
<v Speaker 3>a premium, and it gets halted during the first hour

0:12:20.080 --> 0:12:22.840
<v Speaker 3>of trading. And what we noticed was that the ETFs

0:12:22.880 --> 0:12:26.319
<v Speaker 3>that had the most halt got the most inflows. And

0:12:26.400 --> 0:12:29.400
<v Speaker 3>in China there's a QT system, which is qualified Domestic

0:12:29.440 --> 0:12:32.920
<v Speaker 3>Institutional investor, and this is the quota that goes into

0:12:32.960 --> 0:12:36.240
<v Speaker 3>foreign stocks. And what was happening was all of these

0:12:36.280 --> 0:12:39.679
<v Speaker 3>fundhouses their quota was being reached because retailed investors were

0:12:39.679 --> 0:12:43.640
<v Speaker 3>investing into s and P five hundred MSCIUSA, Nike, and

0:12:43.720 --> 0:12:47.360
<v Speaker 3>so these ETFs not only couldn't create, but their trading

0:12:47.440 --> 0:12:50.360
<v Speaker 3>was halted and they had a huge demand. And so

0:12:51.160 --> 0:12:54.360
<v Speaker 3>there were in essence, trying to solve this problem. And

0:12:54.400 --> 0:12:56.080
<v Speaker 3>so they said, look, we're trying. We know people are

0:12:56.080 --> 0:13:00.000
<v Speaker 3>going overseas, people are looking for better returns. Let's start

0:13:00.160 --> 0:13:02.600
<v Speaker 3>investing in our own economy and see if this will

0:13:02.600 --> 0:13:05.439
<v Speaker 3>boost the market. And so this is really why they started,

0:13:05.720 --> 0:13:10.160
<v Speaker 3>i think, potentially investing into ETF's listed in China.

0:13:11.679 --> 0:13:14.000
<v Speaker 2>Yeah, that this part of the story really intrigues me

0:13:14.040 --> 0:13:17.520
<v Speaker 2>because you've got all these Chinese investors, and there's a

0:13:17.520 --> 0:13:19.960
<v Speaker 2>lot of them, and their market is in the gutter,

0:13:20.200 --> 0:13:23.240
<v Speaker 2>and they're trying to say for retirement, and they can

0:13:23.280 --> 0:13:26.440
<v Speaker 2>see the US just going crazy every year, the cues

0:13:26.559 --> 0:13:28.800
<v Speaker 2>just crushing it and crushing it, and they're getting this

0:13:28.840 --> 0:13:33.120
<v Speaker 2>fomo understandably, but they can't really get over here. And

0:13:34.160 --> 0:13:36.080
<v Speaker 2>because of the quota and the Chinese government, they have

0:13:36.120 --> 0:13:38.640
<v Speaker 2>to pay this premium. And so not only are they

0:13:38.640 --> 0:13:41.120
<v Speaker 2>buying into the US market which is at all time highs,

0:13:41.400 --> 0:13:43.640
<v Speaker 2>they're buying into it at thirty forty percent premium on

0:13:43.679 --> 0:13:46.000
<v Speaker 2>top of that, and they're leaving a market that's like

0:13:46.360 --> 0:13:48.920
<v Speaker 2>in the gutter. This just feels like it's going to

0:13:49.000 --> 0:13:53.320
<v Speaker 2>end in tears, Rebecca, Like it's almost like you could

0:13:53.320 --> 0:13:56.040
<v Speaker 2>just sense the timing is bad. You're supposed to buy

0:13:56.080 --> 0:14:00.240
<v Speaker 2>low and sell high. They are buying really high and

0:14:00.320 --> 0:14:04.760
<v Speaker 2>selling really low. Am I wrong? Yeah?

0:14:04.800 --> 0:14:08.240
<v Speaker 3>So I think that's why the national team has stepped in,

0:14:08.320 --> 0:14:11.960
<v Speaker 3>because ultimately they want the retail investors to invest in

0:14:12.000 --> 0:14:14.600
<v Speaker 3>their own market. And an interesting stat about the China

0:14:14.640 --> 0:14:18.760
<v Speaker 3>market is that it's roughly seventy seventy five percent retail,

0:14:19.000 --> 0:14:21.720
<v Speaker 3>so institutions really don't play that much and it's only

0:14:21.760 --> 0:14:25.000
<v Speaker 3>really this year that we've seen institution increase because of

0:14:25.040 --> 0:14:28.120
<v Speaker 3>the China national team. So from retail perspective, yes, they're

0:14:28.160 --> 0:14:30.760
<v Speaker 3>being burned because they didn't make money on China. Now

0:14:30.800 --> 0:14:33.600
<v Speaker 3>they're going into the US market and all time high

0:14:33.760 --> 0:14:37.120
<v Speaker 3>plus the premium, and so there's definitely a lot of

0:14:37.160 --> 0:14:40.560
<v Speaker 3>cautious caution needed for these investors.

0:14:40.960 --> 0:14:44.400
<v Speaker 2>Give us a rundown here. So the Chinese market has

0:14:44.480 --> 0:14:47.720
<v Speaker 2>the central bank buying in and the Bank of Japan

0:14:47.760 --> 0:14:50.000
<v Speaker 2>has stopped. So where do these two countries sit on

0:14:50.040 --> 0:14:54.520
<v Speaker 2>like the top ten list by ETF assets in Asian countries?

0:14:55.120 --> 0:14:58.320
<v Speaker 2>And do you think we'll see like China overtake Japan.

0:15:00.360 --> 0:15:03.720
<v Speaker 3>So I do think that China could potentially overtake Japan

0:15:03.840 --> 0:15:07.120
<v Speaker 3>as quickly as two years. And the reason for that

0:15:07.240 --> 0:15:10.520
<v Speaker 3>is in terms of assets under managed, Japan ranks number

0:15:10.560 --> 0:15:13.400
<v Speaker 3>one with roughly six hundred billion in assets under management.

0:15:13.640 --> 0:15:17.680
<v Speaker 3>But Japan has actually slowed down significantly in recent years.

0:15:18.000 --> 0:15:20.600
<v Speaker 3>And so with the Bank of Japan not buying ETF,

0:15:20.680 --> 0:15:23.320
<v Speaker 3>they really have to grow the market organically, and that's

0:15:23.360 --> 0:15:26.280
<v Speaker 3>why in Japan they launched this new program called the

0:15:26.400 --> 0:15:30.080
<v Speaker 3>NIPO Individual Savings Account, which is a tax free stock

0:15:30.200 --> 0:15:34.840
<v Speaker 3>investment group aimed for investors to really invest into the market.

0:15:34.880 --> 0:15:36.080
<v Speaker 3>So it's kind of like your four oh one K

0:15:36.160 --> 0:15:38.520
<v Speaker 3>in the US where there's tax free, when you can

0:15:38.560 --> 0:15:42.040
<v Speaker 3>purchase ETFs tax free. And so I think mainland China

0:15:42.160 --> 0:15:45.240
<v Speaker 3>could surpass Japan as quickly as two years in terms

0:15:45.280 --> 0:15:49.160
<v Speaker 3>of assets under management and become number one. This could

0:15:49.400 --> 0:15:51.960
<v Speaker 3>even go as quickly as one year if the national

0:15:52.000 --> 0:15:54.280
<v Speaker 3>team keeps buying at the rate that they're buying at.

0:15:54.320 --> 0:15:57.400
<v Speaker 3>So it'll be interesting to see who is number one

0:15:57.480 --> 0:15:58.400
<v Speaker 3>in the next few years.

0:15:59.400 --> 0:16:01.280
<v Speaker 2>And let me have you question, Like say I went

0:16:01.360 --> 0:16:06.200
<v Speaker 2>into China and I walked one thousand miles through the country,

0:16:06.720 --> 0:16:08.880
<v Speaker 2>and I asked everybody that I came in contact with,

0:16:09.200 --> 0:16:12.400
<v Speaker 2>do you know what an ETF is? What percentage of

0:16:12.440 --> 0:16:13.840
<v Speaker 2>the people would say yes.

0:16:17.240 --> 0:16:19.760
<v Speaker 3>I would say most people don't know what it is

0:16:19.840 --> 0:16:22.520
<v Speaker 3>because in China a lot of the way the main

0:16:22.560 --> 0:16:25.280
<v Speaker 3>way that people invest is through their mobile phone, and

0:16:25.360 --> 0:16:29.200
<v Speaker 3>so it's through these mobile payment apps like Alipay and

0:16:29.240 --> 0:16:32.520
<v Speaker 3>we Pay that people can invest in. Most of these

0:16:32.560 --> 0:16:36.120
<v Speaker 3>products are money market funds, and so I'd say ETF

0:16:36.160 --> 0:16:39.440
<v Speaker 3>is still relatively new and there's still a lot of

0:16:39.600 --> 0:16:42.240
<v Speaker 3>education to be done. But the other challenge that China

0:16:42.280 --> 0:16:46.160
<v Speaker 3>faces is they have more than seventy etf issuers, and

0:16:46.600 --> 0:16:49.600
<v Speaker 3>so from a marketing perspective, it's very hard to compete

0:16:49.640 --> 0:16:53.760
<v Speaker 3>against because when you launch one product there's no unique feature,

0:16:53.800 --> 0:16:57.200
<v Speaker 3>you usually have ten to fifteen etf issuers launching the

0:16:57.240 --> 0:17:00.600
<v Speaker 3>exact same product at the exact same time. So think

0:17:00.640 --> 0:17:03.880
<v Speaker 3>of your Bitcoin ETF having eleven etf issuers launch at

0:17:03.880 --> 0:17:07.520
<v Speaker 3>the same time, happening for almost every single launch. The

0:17:07.560 --> 0:17:10.879
<v Speaker 3>competition is fierce, and so in terms of brand recognition,

0:17:10.920 --> 0:17:15.440
<v Speaker 3>it's a muddy place, very difficult. It's a very competitive landscape.

0:17:15.600 --> 0:17:18.720
<v Speaker 1>I'm curious if we take Eric's thousand mile journey through

0:17:18.760 --> 0:17:21.640
<v Speaker 1>the countryside and ask the same thing in Japan, would

0:17:21.640 --> 0:17:22.840
<v Speaker 1>there be much of a difference.

0:17:24.920 --> 0:17:28.280
<v Speaker 3>I would think that Japan you'd probably have more people

0:17:28.680 --> 0:17:31.560
<v Speaker 3>that know about it because Japan's had ETF since nineteen

0:17:31.600 --> 0:17:35.240
<v Speaker 3>ninety five. Mainland China only started ETFs in two thousand

0:17:35.240 --> 0:17:38.840
<v Speaker 3>and four, and so the time difference I think does help.

0:17:38.880 --> 0:17:41.880
<v Speaker 3>And Bank of Japan has been buying ETFs for fourteen.

0:17:41.600 --> 0:17:44.800
<v Speaker 1>Years and so the headline news for a while.

0:17:46.119 --> 0:17:48.280
<v Speaker 3>Know about it, and the thing is in Japan they

0:17:48.359 --> 0:17:52.320
<v Speaker 3>launched this NISSA program which is aimed at individual saving asccount,

0:17:52.560 --> 0:17:55.119
<v Speaker 3>so that means that they have sufficient retail demand to

0:17:55.240 --> 0:17:57.760
<v Speaker 3>know what this is. While in China, I think if

0:17:57.960 --> 0:18:01.160
<v Speaker 3>Eric were to walk one thousand miles in I would

0:18:01.200 --> 0:18:05.080
<v Speaker 3>say fifty percent would not at least fifty percent would

0:18:05.080 --> 0:18:06.480
<v Speaker 3>not know what an ETF is.

0:18:06.720 --> 0:18:11.000
<v Speaker 2>I would walk one thousand miles to see if anyone

0:18:11.040 --> 0:18:15.440
<v Speaker 2>knows about ETFs.

0:18:16.040 --> 0:18:20.879
<v Speaker 1>Okay, Rebecca, this was a fascinating comparison between Japan and China.

0:18:20.920 --> 0:18:24.040
<v Speaker 1>What else, as we wrap here, what else should our

0:18:24.080 --> 0:18:28.399
<v Speaker 1>listeners know about ETFs? In Asia?

0:18:28.720 --> 0:18:32.240
<v Speaker 3>Hong Kong is going to launch the first spot bitcoin

0:18:32.400 --> 0:18:35.840
<v Speaker 3>and we could see the first launch as early as May.

0:18:36.119 --> 0:18:38.439
<v Speaker 3>And what's interesting about this is Hong Kong's going to

0:18:38.440 --> 0:18:43.240
<v Speaker 3>take in kind creation and so bitcoin in ETF out

0:18:43.480 --> 0:18:47.600
<v Speaker 3>and so this could be groundbreaking for Asia. Given the

0:18:47.720 --> 0:18:50.080
<v Speaker 3>success of the US with a spot bigcoin ETF. This

0:18:50.119 --> 0:18:52.360
<v Speaker 3>is a very interesting space that we're watching very closely.

0:18:52.680 --> 0:18:54.600
<v Speaker 2>Apparently in the US the SEC didn't want to do

0:18:54.640 --> 0:18:57.760
<v Speaker 2>in kin creations and redemptions because they thought that bad

0:18:57.800 --> 0:19:00.760
<v Speaker 2>people would use the ETF to launder money, but they

0:19:00.840 --> 0:19:01.880
<v Speaker 2>might go to Hong Kong.

0:19:01.680 --> 0:19:02.040
<v Speaker 1>To do it.

0:19:02.800 --> 0:19:05.520
<v Speaker 3>I'd say everyone should watch out for Asia Pacific right now,

0:19:05.560 --> 0:19:08.520
<v Speaker 3>because we currently have as of December twenty twenty three,

0:19:08.800 --> 0:19:11.600
<v Speaker 3>one point five trillion dollars in assets, and we may

0:19:11.800 --> 0:19:15.159
<v Speaker 3>very well, very quickly surpass Europe in terms of assets

0:19:15.240 --> 0:19:18.240
<v Speaker 3>under management, especially with the rate of where mainland China

0:19:18.320 --> 0:19:23.960
<v Speaker 3>is growing, the growth in India, Taiwan, ETF. Assets in

0:19:24.000 --> 0:19:27.400
<v Speaker 3>Asia Pacific can surpass Europe as quickly as two years.

0:19:28.440 --> 0:19:29.160
<v Speaker 3>So watch out.

0:19:29.280 --> 0:19:32.359
<v Speaker 1>Sound wowow it sounds like a bet Olbi team.

0:19:32.480 --> 0:19:34.120
<v Speaker 2>I agree, by the way, that should be a note.

0:19:34.240 --> 0:19:36.080
<v Speaker 2>You should definitely write that Asia is going to pass

0:19:36.119 --> 0:19:38.840
<v Speaker 2>Europe in two years something like that. That's how we

0:19:38.880 --> 0:19:40.240
<v Speaker 2>think of notes on the team. Right there, you just

0:19:40.240 --> 0:19:42.719
<v Speaker 2>had a little insight schul you want which I think

0:19:42.800 --> 0:19:43.359
<v Speaker 2>it's enough.

0:19:43.480 --> 0:19:43.960
<v Speaker 1>It's enough.

0:19:44.000 --> 0:19:44.840
<v Speaker 2>I get it.

0:19:46.640 --> 0:19:49.800
<v Speaker 1>Rebecca. Thanks for joining us on Trillions.

0:19:50.800 --> 0:19:51.600
<v Speaker 3>Thank you for having me.

0:19:58.440 --> 0:20:01.399
<v Speaker 1>Thanks for listening to Trillions. Until next time. You can

0:20:01.440 --> 0:20:06.320
<v Speaker 1>find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,

0:20:06.920 --> 0:20:09.359
<v Speaker 1>or wherever else you'd like to listen. We'd love to

0:20:09.400 --> 0:20:12.720
<v Speaker 1>hear from you. We're on Twitter. I'm at Joel Webber Show.

0:20:13.119 --> 0:20:17.760
<v Speaker 1>He's at Eric Baltunas. This episode of Trillions was produced

0:20:17.760 --> 0:20:24.440
<v Speaker 1>by Magnus Hendrickson Bye