Here's a novel idea. With many economists considering China on the verge of mounting a serious comeback in the second half of this year, what about an exchange-traded fund that provides exposure to the mainland's previously untapped local stock market?

That time has come. Van Eck Global Advisors has filed to launch the Market Vectors China A-Shares ETF on the New York Stock Exchange. The proposed ETF would start by dealing in swaps and derivatives to mimic its underlying index.

As noted in the filing, so-called A-shares in China are largely only made available to local investors. But there are some cracks opening in China's wall to outside investors: Namely, the Qualified Foreign Institutional Investor program, a special license granting foreign investment groups access to local markets.

"There is no assurance that the adviser will be able to obtain a QFII license and, if so, when such license would be granted," said Van Eck in its filing, which is dated March 30.

"Furthermore, there are significant legal and operational obstacles that will need to be resolved before the fund can invest directly in the A-share market including repatriation restrictions and A-share quota limitations," the registration statement continued.

In the meantime, Van Eck will seek other ways to gain exposure to what it describes as a sometimes volatile and illiquid marketplace.

"Therefore, unless and until the fund is able to invest directly in A-shares, the fund intends to invest in China A-share Access Products (CAAPs), swaps and other types of derivative instruments that have economic characteristics that are substantially identical to the economic characteristics of A-shares in order to gain access to the A-share market," the filing states. 

So far, 34 different ETFs are offered to investors for exposure to different parts of Asia. (See related story here.) Among those are several China-specific offerings, including: the iShares FTSE/Xinhua China 25 Index (NYSE: FX); the SPDR S&P China (NYSE: GXC) and the PowerShares Golden Dragon Halter USX China (NYSE: PGJ).

All of the China-specific country ETFs at this point are gaining access to China through various other classes of stock. In some investors' minds, at least, that raises the question of how important an ETF devoted to just A-shares really might be. As Burton Malkiel, the Princeton prof and well-known financial author has observed, China tends to show off its best companies by letting them list in the U.S. The second-tier stocks are allowed to list in Hong Kong while the rest remain for mainland China's local consumption through the Shanghai and Shenzhen stock exchanges.

Not everyone is so convinced, arguing that the A-shares market represents an untapped source of foreign investment and capital growth. The filing notes that at the end of 2008, nearly $13 billion in foreign capital had been allowed into the country to invest in A-shares through the QFII process. The certification system does carry its own set of quotas and mandates on how many securiities outsiders can own, Van Eck added. 

And consider that in the first quarter of 2009, the top performing index in the world was the Shanghai Composite. A closed-end fund, the Morgan Stanley China A Share Fund (CAF), had soared nearly 50% in the opening three months of 2009. Meanwhile, the China-focused ETFs not investing in A-Shares currently on the market were flat to slightly negative in the quarter. 

Until it can purchase A-shares directly, the fund's use of derivatives could pose some operational kinks. For example, CAAPs are designed to replicate "the economic benefit of the relevant A-share of the index in so far as possible," said the filing. 

However, a CAAP doesn't provide direct ownership in A-shares, it added. 

"The adviser’s ability to manage the fund may depend upon the continuing availability of CAAPs. CAAPs are of limited duration and there is no guarantee that CAAPs issued by a CAAP issuer to the fund will continue indefinitely. Accordingly, the duration of the CAAP depends on the ability of the adviser and the fund to renew the expiration period of the relevant CAAP," said the document. 

It added: "Given that the A-share market is considered volatile and unstable (with the risk of suspension of a particular stock or government intervention), the creation and redemption of shares may also be disrupted. In addition, although the terms of CAAPs issued by different CAAP Issuer will be similar, the fund may face practical limitations that effectively limit the fund’s ability to deliver certain CAAPs in responding to redemption requests and may prevent the adviser from maintaining the fund’s credit exposure to CAAP issuers at desired levels."

Part of the filing warns about not knowing the complete story of how the A-shares market will evolve. More government restrictions and changes to current taxing policies could hamper liquidity. "A liquid secondary market may not always exist for the fund’s derivative positions at any time," stated Van Eck in its filing. 

An important side note, here, though might be that the fund's mandate leaves open the option to invest up to 20% of its underlying index's constituent weightings in Hong Kong and other outside markets.

No other details were given related to expense ratios or the proposed fund's benchmark.  

You can read the filing here.