New | Investors use ETFs as a short cut to bet on Chinese shares
The turnover in exchange traded funds (ETFs) of A-shares and H-shares vaulted higher substantially in the rally which hoisted stocks to a 7-year peak as global investors used the index funds as a short cut to bet on the stock markets in Hong Kong and mainland China.
Marco Montanari, the head of passive asset management for Asia Pacific of Deutsche Asset & Wealth Management, which has A-shares and H-shares ETFs listed in Hong Kong, Singapore, London and New York, said investors rushed to trade the ETFs over the recent rally in the past two weeks.
“We have seen investors in Hong Kong redeem the A-shares ETF and subscribe the H-shares ETF. In a sense, they are using the ETF as a quick way to sell the A-shares and to buy the H-shares to take advantage of the price gap between the two as the H-shares still trading at a discount of their A-share counterparts,” Montanari said.
Turnover of the New York A-shares ETF, for example, hit US$149.36 million last Friday (April 17), some two-and-a-half times the turnover the preceding Friday (April 10) of US$57.99 million.
A-shares are Chinese stocks listed in Shanghai or Shenzhen while H-shares are those Chinese stocks listed in Hong Kong. ETFs are funds that track the performance of the index. Investors who purchase a unit of the funds are putting their money in a basket of these stocks.
“In the US and Europe, however, investors are trading with a different pattern. They do not trade to do arbitrage between the A-shares and H-shares. Rather, they trade the ETFs as a simple way to invest in the Chinese stocks as they are not familiar with individual Chinese stocks as Hong Kong investors,” he said.
Montanari expected the Chinese ETFs would continue to remain strong as investors are still interested in trading in China economic growth story and the government policy to support the market.
“International investors are still interested to invest in the Chinese stock markets which would mean the turnover of ETFs of A-shares and H-shares would continue to grow in the future,” Montanari said.
The People’s Bank of China announcement on Sunday for a 1.0 percentage point reduction in the reserve requirement ratio (RRR) to 18.5 per cent, following a 0.5 per cent percentage point cut on February 4 and two interest rate cuts since last November, clearly bolstered the liquidity by an estimated 1.2 trillion yuan.
This can only mean more funds flowing into a market where the Hang Seng index is up 15.35 per cent year to date and the Shanghai Composite is 30.4 per cent up year to date as of Monday’s close.
Turnover in ETFs has benefited from Hong Kong government policy which waived the stamp duty from February 13 for the 26 ETFs that track the index.
Since the initial stamp duty waiver was extended in 2010, ETF listings in Hong Kong have increased from 69 at the end of 2010 to 124. Average daily ETF turnover also increased substantially, rising from HK$2.4 billion in 2010 to HK$4.7 billion last year. The total turnover of ETFs’ contribution to HKEx’s securities market turnover nearly doubled from 3.5 per cent in 2010 to 6.9 per cent last year, when Hong Kong was ranked third in ETF turnover in Asia and sixth globally.
Rosita Lee, head of investment products and advisory business of Hang Seng Bank, which is the largest ETF provider in the city in terms of asset under management, said both international institutional investors and retail investors are interested to trade the ETFs in the recent market rally.
Daily turnover of the Hang Seng Bank’s H-share ETFs reached a peak at HK$6.24 billion on April 9 when the local market posted a record high turnover and the benchmark Hang Seng Index reached its seven year peak above 28,000.
The Hang Seng H-shares ETFs turnover stood at almost HK$5 billion every day from April 10 to 14 before dropping back to HK$2.57 billion on April 15.
“We have seen international investors ask us to issue more ETF units for them while retail investors have subscribed more ETFs in the recent rally,” Lee said.
“We expect the ETFs that track the Chinese stocks and H-share would continue to be actively traded this year. This is because the stock-connection between Hong Kong and Shanghai and later to Shenzhen is set to attract more investors to trade the ETFs. In addition, the Chinese government’s policy relaxation would also be positive to the stock market turnover,” she said.
“The market may have some healthy corrections in the near term, but for the longer term, we expect both the A-shares and H-shares market would do well,” she added.
