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