A-share ETFs set for Hong Kong launch

Two offshore ETFs tracking A-share indices are to be listed in Hong Kong under the RQFII scheme at the end of this month managed by Chinese fund houses E Fund and CSOP.

The instruments have been approved by Hong Kong’s Securities and Futures Commission (SFC) and are set to list on the Hong Kong stock exchange on August 27 and 28, say industry sources.

The fund managed by E Fund will track the CSI 100 Index, while the fund by CSOP the FTSE China50.

China’s State Administration of Foreign Exchange (Safe) granted Rmb5 billion to CSOP and Rmb2 billion to E Fund on July 27, as reported, and will allocate additional quota to these managers if there is sufficient demand.

China Asset Management Company was the first to receive Rmb5 billion in a second batch of renminbi-denominated qualified foreign institutional investor (RQFII) quotas on May 28. Its ETF tracking the CSI 300 Index has been listed on the Hong Kong exchange since July 17.

These three RQFII products are all physically backed A-share ETFs listed offshore, and as such pose a challenge to existing synthetic ETFs managed by international players.

China AMC raised HK$3.79 billion for the ETF during its initial public offering, and since then its market cap has risen to HK$3.98 billion.

That means it is second in size to the HK$7.44 billion W.I.S.E. CSI 300 China Tracker managed by BOCI Prudential, a synthetic A-Share ETF listed in Hong Kong since July 2007 with a feeder fund in Taiwan managed by Yuanta (formerly Polaris).

Meanwhile, CSOP is launching a direct challenge to the iShares FTSE A50 China index ETF, the largest A-Share exchange-traded fund in the world with about HK$45 billion in assets and turnover of around $100 million a day.

Jackie Choy, an ETF strategist at Morningstar, notes that since news about RQFII A-share ETFs broke in April, the premium on the iShares China A50 ETF has gone down.

“In the first four months of this year the iShares A50 had a premium of around 6-7% or higher, but it has come down to around 1-2% in the past two months,” he states.

“This ETF has been trading at a premium most of the time because investors have to pay to get CAAPs [China A-shares Access Products], which are issued by participating dealers with QFII quota. When the RQFII ETFs came to market, the demand for synthetic A-share ETFs came down and this was one of the reasons that the premium also came down.”

E Fund is going to be the first manager of a CSI 100 ETF and as such will have the advantage of breaking new ground.

“If you are the first one to track an index, such as CSI 100 Index and MSCI China A Index, these indices, though less well-known to investors, are the differentiator themselves and you will face much less competition,” Choy says. 

Harvest is to manage the MSCI China A Index ETF, but the firm is still awaiting a quota from Safe.

Separately, it was announced late last week that China is set to launch the country's first gold ETFs soon. Hua An FMC and Guotai AMC have completed plans for these products, which will be traded on the Shanghai Stock Exchange, according to Chinese media reports.

For a more detailed look at RQFII exchange-traded funds, please see AsianInvestor magazine’s forthcoming September issue.