HuaAn, Guotai ready landmark gold ETFs

Jun 17, 2013

China's first two gold ETFs are set to list, against the backdrop of a recent drop in global demand for the metal – though mainland fund houses see this as a buying opportunity.

The Chinese love their gold – the country is the biggest consumer of the yellow metal after India. China Gold Association data shows that mainlanders bought 832 tonnes of gold last year, a 9.34% increase from 2011 and 320.54 tonnes in the first quarter of this year, a 25.6% year-on-year rise.

Two mainland fund houses – HuaAn and Guotai – will be hoping this push into the precious metal will continue after the China Securities Regulatory Commission gave them approval last week to launch the country's first gold exchange-traded funds.

This will allow onshore investors to diversify away from jewellery and physical gold for the first time and join the global gold ETF universe, which was worth $157 billion at the end of last year.

Despite a recent run on gold – SPDR Gold Shares, the world's largest gold ETF, has seen outflows of $16.5 billion year-to-date through Friday, and gold prices are down 16% from the start of the year – HuaAn Funds says the substantial drop in prices will boost investor interest.

The gold price closed at $1,385.70 an ounce on June 17, up from a two-year low of $1,321.35 in mid-April, but down 16% from $1,657 at the start of the year.

Still, Xu Zhiyan, HuaAn's gold ETF portfolio manager, insists that "demand will increase due to low gold prices", noting an interest from institutional and retail investors on the mainland.

According to media reports, HuaAn expects to raise at least Rmb2 billion ($326 million) for its ETF, but Xu declined to comment on fundraising targets.

Xu and Guotai Asset Management declined to say when the ETFs will be listed, both of which will be offered on the Shanghai Stock Exchange and traded in renminbi.

The funds will track spot movements on the Shanghai Gold Exchange, the country's benchmark index tracking metal with at least 99.99% gold content.

Guotai's ETF will invest at least 90% of its assets in spot gold contracts, which are backed by physical gold. The remaining 10% will invest in bonds and money market funds, with some put aside for potential redemptions as well.

The minimum investment in the primary market for Guotai's ETF is 300,000 units (3 kilograms) and for the secondary market, 100 units (1 gram).

The ETFs are very liquid – with T+0 settlement, investors can redeem the same day. HuaAn's ETF will have a management fee of 0.5%, slightly higher than the SPDR ETF management fee of 0.4%. Guotai declined to disclose the fees for its new fund.