China’s rapidly expanding ETF market is showing signs of extreme polarization, with multiple funds recently issuing warnings about potential liquidation due to shrinking assets. A Shanghai Securities News investigation reveals more than 180 ETFs currently suffer from daily turnover below 1 million yuan ($138,000), while some see trading volumes under 10,000 yuan – indicating near-total liquidity evaporation.
Liquidity crisis hits small ETFs
Invesco Great Wall Fund became the latest to flag risks, announcing on June 6 that its MSCI China A International ETF had maintained assets below 50 million yuan for 50 consecutive working days – approaching the 60-day threshold that would trigger automatic termination under fund rules. Similar warnings were issued in May by ICBC Credit Suisse for its CSI 2000 ETF and CSI A100 ETF, along with Yinhua’s CSI 1000 Enhanced Strategy ETF.
Industry data paints a stark picture:
- 147 of 1,179 listed ETFs hold assets below 50 million yuan
- 39 ETFs manage less than 20 million yuan, with some dwindling to mere millions
- 582 ETFs recorded June 6 turnover under 10 million yuan
- 186 ETFs saw daily trading below 1 million yuan
Extreme cases include the Qianhai Kaiyuan 500 Equal-Weight ETF, which traded just 1,586 yuan and 2,171 yuan on consecutive days. “Liquidity represents an ETF’s lifeline,” cautioned ChinaAMC analysts. “Illiquid funds face wider bid-ask spreads and execution risk during market stress, creating hidden costs that erode returns.”
Innovation imperative for survival
With median ETF management fees failing to cover costs according to Wind Fund data, industry leaders emphasize differentiation strategies:
Strategic recommendations
- Institutional products: Develop insurance-friendly stable-return ETFs and niche sector/thematic funds, per Ping An Life’s Jia Yatong
- Advanced strategies: Explore options-enhanced and transparent active ETFs, suggests Bosera’s Zhao Yunyang
- Smart specialization: Smaller firms should focus on unique factor/Smart Beta strategies rather than competing in saturated core indices
Huatai Securities research highlights lessons from global markets where innovation created first-mover advantages before fee compression set in. “Product parity isn’t fatal if issuers align capabilities with market gaps,” noted a report author. “The $4 trillion ETF market still has room for novel solutions.”
As China’s ETF ecosystem matures, the coming shakeout may separate truly differentiated products from the growing graveyard of me-too funds – testing asset managers’ ability to innovate beyond index replication.
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