China fund managers ready more ETFs

Huaan Fund Management and China Asset Management, two of mainland China's leading fund houses, are preparing to launch exchange-traded funds this year. China's first exchange-traded fund, launched at the end of 2004 by Beijing-based China Asset Management, raised over Rmb5 billion ($660 million) during its initial offering period at a time when the A-share market was losing value and other equity funds were suffering redemptions.

Now ChinaAMC's rival Huaan Fund Management, based in Shanghai, will launch the country's second equity ETF this September, says Frank Yao Yuling, executive vice president and CIO at Huaan. China Construction Bank will serve as primary distributor.

The ChinaAMC 50 ETF has continued to do well. As of August, 2005, total outstanding shares in the China 50 ETF, which tracks the blue-chip Shanghai Stock Exchange 50 Index, exceeded 10 billion and the fund size had reached almost Rmb9 billion ($1.11 billion). Its clients include key domestic institutions such as the National Social Security Fund as well as foreign qualified institutional investors.

Recently, Société Générale launched a call warrant based on the China 50 ETF on the Singapore Stock Exchange - the first such instrument based on the A-share market. Guotai Junan Securities is also developing a domestic warrant on it.

"ChinaAMC's ETF did well and the stock exchange actively marketed it," Yao says. "We think demand will still be there for ETFs, especially from institutional investors, because of its liquidity and the pure index representation it provides. Whether we can raise the same AUM, I don't know."

Huaan's version will track another Shanghai Stock Exchange index, the 180. "Ours has broader coverage, and we've had longer to prepare," Yao says.

State Street Global Advisors acted as technical advisor to ChinaAMC's ETF effort. Yao says Huaan has been more independent, although it did cooperate initially with Bank of New York. "We developed most of the technology and investment methodologies ourselves," Yao says. "We will use a sampling technique to duplicate 120-150 stocks and replicate the entire 180." He says the paper track record indicates a low tracking error.

Meanwhile, ChinaAMC is reportedly working on the mainland's first fixed-income ETF, based on the mandate it won early in 2005 to manage the renminbi tranche of the Asian Bond Fund-2, the $2 billion initiative seeded by the region's central banks. The ETF would use the iBoxx index, and represents a trend across the region to list ABF-2 mandates as ETFs where possible, including Hong Kong, Singapore, Thailand and Malaysia.

ChinaAMC officials declined to comment, and the product application is said to be with several regulators, including the China Securities Regulatory Commission and the People's Bank of China.

The lingering question is reportedly PBoC's concern that the ETF would be both listed on the Shanghai bourse as well as traded on the OTC inter-bank market, which may blur lines concerning existing rules on financial institutions' means of trading securities, according to market sources.