CSOP launching first ChiNext ETF with eye on shorting
CSOP Asset Management will today list the first renminbi ETF tracking Shenzhen’s ChiNext index, which has seen explosive growth this year.
The Hong Kong-listed fund is being launched in a bid to offer foreign managers the opportunity to short the controversial high-growth market as well as diversify their portfolio.
But it comes just days after reports that a Chinese regulator advised mutual funds to reduce their ChiNext exposure, amid concerns over stocks’ rocketing valuations.
The CSOP SZSE ChiNext exchange-traded fund will invest in the 100 biggest capitalised companies on the ChiNext market, or 47% of the total, using the renminbi qualified foreign institutional investors (RQFII) scheme. ChiNext is a high-growth enterprise board on the Shenzhen Stock Exchange.
Investors have had concerns that the high valuations of China’s small-cap stocks risk creating an equity bubble, as reported.
But Jack Wang, Hong Kong-based CSOP’s head of sales, said that the firm did not receive any special requests during the regulatory approval process. However, from a manager’s perspective, he said CSOP would like to highlight risk factors and put more efforts into risk disclosure.
Reports by foreign and Chinese media last weekend said that the China Securities Regulatory Commission (CSRC) was asking fund companies to reduce their exposure on the ChiNext market, but fund managers said they were unaware of such requests.
The regulatory body is expected to respond to the rumour during its regular media briefing today.
Wang said that both long and short investors had shown interest in the new ETF based on their views of China’s high-growth companies.
Foreign investors such as Europe- and US-based hedge funds and trading-driven investors were interested in shorting the ETF, Wang said, because of their concerns over the high valuations of onshore small-cap stocks. In addition, there was a limited choice of China shorting instruments available in overseas markets, he added.
“We see active borrowing and shorting activities on the [Hong Kong-listed] A50 ETFs in recent months - investors will have more choice in expressing their market views after this fund’s listing,” Wang said.
Long investors, particularly those based in Taiwan and Korea, appear to be interested in diversifying their China portfolios. Wang said such investors have built their own research teams and have a better understanding of the underlying index. In addition, they need to find a way to get exposure to Shenzhen-listed stock while the Shenzhen-Hong Kong Stock Connect is still in the planning stages.
The ETF will be the first such fund purely tracking the ChiNext index; US-based ETF provider Van Eck Global teamed up with China AMC to list an ETF tracking Shenzhen’s SME-ChiNext 100 index in New York in July last year.
The ChiNext index has soared by 113.7% this year, while its trailing price-to-earning ratio yesterday hit 109 times. Meanwhile, the Shenzhen A-share index, a Shenzhen Stock Exchange benchmark, has increased by 73.6 % this year, with its trailing PE ratio yesterday hitting 61 times.
CSOP is the largest RQFII holder with Rmb46.1 billion ($7.4 billion) as of the end of April. The firm started to use Stock Connect instead of its RQFII quota when the trading link was launched in November last year. Its flagship product, the Hong Kong-listed A50 ETF, has allocated 30% of its fund to Stock Connect, according to the firm’s latest data.