New exchange-traded fund lets foreigners invest directly in shares listed in mainland China
Foreign investors looking to get access to China’s onshore market will have a new avenue starting on Wednesday when Deutsche Asset & Wealth Management launches the first ETF with direct exposure to shares of companies listed on the mainland.
The db X-trackers Harvest CSI 300 China A-Shares Fund, set to trade under the ticker ASHR on the NYSE Arca exchange, will be the first exchange-traded fund to directly tap into the A-share market of Chinese stocks priced in yuan and traded in Shanghai and Shenzhen.
Other ETFs have provided exposure to the A-share market through derivatives, not shares. The Market Vectors China ETF, for example, invests in swaps linked to A shares.
“The China A shares market is one of the few remaining major markets that is still somewhat untapped by most global investors, because access to them has been restricted,” said Dennis Hudachek, a senior ETF analyst at IndexUniverse.
To buy securities on the mainland, Chinese regulators require foreigners to apply for status as qualified foreign institutional investors (QFII) or renminbi qualified foreign institutional investors (RQFII), subject to quotas on the amounts they can invest. Recently, regulators in Beijing have expanded the number of foreign investors allowed to buy A shares.
The China A shares market is one of the few remaining major markets that is still somewhat untapped by most global investors, because access to them has been restricted
“Transacting in China logistically is more complicated than in the US,” Alex Depetris, chief operating officer of Deutsche’s exchange-traded products business in the Americas, said in an interview.
Deutsche has partnered with Harvest Global Investments, which is an RQFII, and a unit of Harvest Fund Management, the second-largest asset management company in China.
“That really enabled us to develop this product as soon as the RQFII regime started being offered to ETF providers like us,” Depetris said.
ETF watchers will be looking to see if the fund’s RQFII quota is able to accommodate investor demand, which Hudachek said will be the real test.
Asset managers receive quotas for a certain amount of investment. Once that is used, a manager would have to apply for a new quota. That could pose a problem for an ETF, which must buy more assets as investor money comes in.
If the new ETF is able to accommodate investor demand, then the fund “could be a total game changer”, Hudachek said. “There’s a lot of money expected to flow into A shares in the coming years.”
