A new ETF giving access to Chinese A shares is to be launched in Singapore next month.

The United FTSE Xinhua China A50 ETF, to be offered by the asset management subsidiary of United Overseas Bank (UOB), will be the first China A-shares fund to be denominated and traded in Singapore dollars.

Chinese A shares are denominated and traded in Chinese Yuan and listed on the Shanghai or Shenzhen stock exchanges. Historically, access to the A-shares market in China has been limited to Chinese nationals and Qualified Foreign Institutional Investors (QFIIs) approved by the China Securities Regulatory Commission (CSRC).

The FTSE Xinhua China A50 Index is designed to measure the performance of the 50 largest China A-shares companies, based on market capitalisation.

ETFs tracking A shares are already dominant in the Asian market. The Hong Kong-listed iShares Asia Trust, which also tracks the FTSE Xinhua A50 index, is the largest Asian ETF with US$6.7 billion under management. The China 50 ETF, which tracks the Shanghai Stock Exchange 50 index, has US$3.2 billion under management and is the most heavily traded Asian ETF, with an average daily volume of US$200 million in the week ending October 16.

According to Singapore’s Business Times, while the upper limit on the QFII quota for any single investor to invest in China stocks is US$1 billion, the quota available for the United FTSE Xinhua China A50 ETF is US$100 million, as UOB and Rabobank − the counterparty and designated market maker for this ETF − each have a QFII quota of US$50 million.

The iShares Asia Trust does not hold A shares directly but rather holds Chinese A-Shares Access Products (CAAPs) issued by a connected person of a QFII. A CAAP is a security (such as a warrant, note or participation certificate) linked to an A share that synthetically replicates the economic benefit of the relevant A share but carries counterparty risk to the CAAP issuer.

Because of the existence of QFII quotas, A-share ETFs have often traded at premiums to net asset value during periods of significant investor demand. 

Outside Asia, investors are generally restricted to ETFs tracking H shares (firms that are incorporated in China but listed in Hong Kong), Red Chips (firms incorporated in Hong Kong with substantial mainland interests, controlled by the Chinese government), P Chips (Hong Kong-incorporated firms with substantial mainland interests that are not under government control), and China-related shares listed on overseas stock exchanges. (IndexUniverse.eu recently published a feature on the range of options available to investors interested in the Chinese stock markets).

According to the issuer, the total expense ratio for the United FTSE Xinhua China A50 ETF is estimated to be 0.95%. The iShares Asia Trust has a TER of 1.39% and the China 50 ETF has a TER of 0.50%, as per the latest edition of Deutsche Bank’s ETF Liquidity Trends report.