[This article first appeared on our sister site, IndexUniverse.eu.]
A new product from China AMC is likely to change the landscape for index funds by opening up foreigners' access to mainland China.
The long-awaited first Renminbi Qualified Institution Investor (RQFII) ETF finally made it to market in Hong Kong in mid-July, with China AMC's CSI 300 Index ETF raising a whopping RMB3.8 billion (US$595 million). That is about six times the assets under management of an existing CSI 300 tracker from iShares.
And it is not only AMC that is leading the way. Several of its competitors plan to have ETFs up and running in the near future.
As previously reported, China's capital controls restrict foreign access to Shanghai and Shenzhen-listed A shares. Only fund groups with a QFII licence and a quota to bring money into China can invest.
While the authorities are granting QFII licences and quotas a little more freely than before, the operational difficulties involved in running a QFII fund have meant that overseas ETFs tracking the A share market typically do so using swaps with counterparties who have QFII quotas rather than holding shares directly.
However, the RQFII scheme, which began earlier this year, is intended to channel renminbi deposits held offshore back into mainland markets. Under this system, it becomes practical to run physically backed A share ETFs—which may be more attractive to investors concerned about counterparty risk in synthetic products, as well as potentially cheaper. China AMC's product carries an estimated total expense ratio of 0.99 percent a year, compared with TERs of 1.39 percent for many of the existing A share ETFs.
Although first to market, China AMC will not be alone for long. E Fund Management, CSOP and Harvest hope to have ETFs approved in the coming quarter. Each product will likely track a different index, and each provider will be granted around RMB5 billion (US$0.8 billion) in RQFII quota initially, in line with China AMC's cap.
That would amount to total potential supply of RMB20 billion (US$3.1 billion) against around US$7 billion in existing Hong Kong-listed synthetic A share ETFs, the vast majority of which is in iShares' enormous FTSE A50 China tracker. Consequently, RQFII ETFs could have a significant impact on demand for existing tracker products.
In the immediate future, only the international units of mainland brokerages and fund managers will be granted RQFII licences, potentially putting foreign providers at a disadvantage in the Hong Kong market. So it may not be a coincidence that the launch of China AMC's product was quickly followed by an announcement that db x-trackers will be cross-listing its existing synthetic CSI 300 tracker in London, where RQFII products are unlikely to appear for the time being.
Invesco Great Wall Makes ETF Debut
On the mainland, the fund management joint venture between US group Invesco and Shenzhen brokerage Great Wall Securities listed its SSE180 Equal Weighted Index ETF in Shanghai, marking the first ETF from this nine-year-old collaboration. As its name implies, this is a variant on the SSE180 index of the largest A shares on the Shanghai stock exchange.
The new ETF is accompanied by a feeder fund designed to draw retail money into the listed product, as is common in China. Fundraising was not easy for the feeder, with the subscription period extended for several weeks after the original closing date of early June. This may reflect retail investor dissatisfaction with passive strategies given the poor performance of the A-share market. Despite this, total subscriptions to the ETF were RMB1.2 billion (US$188 million) – somewhat better than expected, according to local media reports, with the largest investor being Korean fund manager Mirae Asset Management.
However, the main news in the mainland Chinese ETF market at the moment is the forthcoming launch of the first domestic ETFs that will track Hong Kong-listed stocks. According to reports, the Shenzhen Stock Exchange and the China Securities Depository and Clearing Corporation will be carrying out a test of the cross-border settlement and clearing process next week—these operations will be more complicated than with most ETFs due to China's capital controls—ahead of initial listings late in August. The first products to market will be China AMC's Hang Seng ETF and E-Fund's Hang Seng China Enterprises ETF.