Harvest to list last A-share ETF in first HK batch

Harvest Global Investments (HGI) is set to launch a MSCI China A ETF in the middle of next month in what will be the last of this first batch of A-share exchange-traded funds listed in Hong Kong.

The firm will use the Rmb2 billion ($316 million) RQFII quota that it received from China’s State Administration of Foreign Exchange (Safe) on August 29.

On the same day Safe granted an additional Rmb3 billion quota to E Fund, which had already launched its CSI 100 ETF in Hong Kong on August 27, while last week CSOP received Rmb2 billion additional quota for its A50 ETF listed on August 28.

Harvest initially applied for a quota of Rmb5 billion, but Michelle Chua, its regional head of business development, explains: “The Harvest MSCI China A ETF is a unique product and we expect additional quota to be granted to us once the ETF is fully subscribed.”

This will be the world's first ETF tracking the MSCI China A Index. Harvest argues this product will provide the “broadest direct access to China’s equity market, with target coverage of up to 85%”, with what it adds will be a more balanced sector exposure and low concentration risk.

The MSCI China A Index was launched on May 10, 2005, and by the end of this July it had a free-float-adjusted market cap of Rmb4.8 trillion and 540 constituent stocks.

It is more diversified than indices that other renminbi-denominated qualified foreign institutional investor (RQFII) ETFs track.

According to Morningstar, the FTSE China A50 and CSI 100 have a 62% and 50% concentration in financials, respectively, while the top three sectors are financials (31%), industrials (17%) and basic materials (14%).

Notably the MSCI China A Index, which is 1.4 times the size of MSCI China (including Hong Kong-listed China stocks), is not included in the MSCI Emerging Market Index. This means, offshore investors could potentially gain diversification benefits when investing in Harvest’s forthcoming A-share ETF.

From June 30, 2007, to June 30, 2012, correlation between the MSCI China A Index and HSCCI (which tracks Hong Kong listed red chips) was 0.486, while for HSCEI (tracking H-shares) it was 0.528.

HGI’s parent Harvest Fund Management is investment adviser on the RQFII ETF and will look to distribute dividends annually in October each year. The total expense ratio, inclusive of management fees, is estimated to be 0.8% per annum.

Since the MSCI China A ETF will have the most constituent stocks above other RQFII managers, there has been speculation it was a technical issue with share recreation and the redemption process that delayed the product’s launch.

But Chua says: “We have developed the system and scale for handling large stock baskets, and we do not envisage any issue in the trading of the MSCI China A index.”