Imogene Wong
Monday, September 22, 2014
In recent weeks, China A shares have got a lift and the Shanghai-Hong Kong Stock Connect will push them back on to the investor radar next month when less than 600 A-shares (out of 2,500) will be open to investment by foreigners, initially. More quotas for Renminbi Qualified Foreign Institutional Investors and Qualified Foreign Institutional Investors are expected to create further demand for China equities.
The oldest exchange traded fund in Hong Kong tracking A-shares, is the iShares FTSE A50 China Index exchange-traded fund (2823). It has been trading for nearly 10 years since listing in November 2004 and financial stocks comprise the bulk of its holdings.
The ETF has drawn more than US$1.9 billion (HK$14.7 billion) of capital inflows this year. Assets under management in this synthetic fund, swelled to HK$70.1 billion, a 30 percent growth from September last year. The net asset value as of September 17, was HK$9.05.
This ETF is also the largest fund in terms of assets under management among the 121 ETFs listed in Hong Kong, surpassing others such as Hang Seng Index ETF (2833) or Tracker Fund of Hong Kong (2800).
Jane Leung, head of iShares Asia Pacific, the ETF arm of Blackrock Asset Management North Asia, foresees further inflows. Investors are still mainly from Asia, but there are others.
Investors from Latin America are also showing more interest than those from US or Europe, as "they are more familiar with investing in emerging markets, like themselves
Capital inflows into the fund are similar to CSOP FTSE China A50 ETF Fund (2822) the physical ETF tracking the same index managed by Chinese firm CSOP Asset Management.
At the end of August, BlackRock said it has received approval for an increase in the ETFs Qualified Foreign Institutional Investor quota to US$570 million.
The iShares ETF has a premium of 2.24 percent compared with the asset price it is tracking.
Leung says it is the priority of iShares to launch physical funds, which have lower tracking errors and counterparty risks.
Among iShares' 15 local-listed ETFs, nine of them are China-focused.
But Leung notes that not most investors in the region are home buyers. About 65 percent of assets, or US$33.4 billion under management in Asia Pacific, are invested in offshore products.
The ETF market in Asia Pacific is still in the early stages of development, Leung says. In Japan and Australia, the ETF business does not compare with that of Europe and the US.
For iShares, the world's largest ETF issuer, the FTSE A50 China Index remains the biggest ETF in Asia Pacific in terms of AUM. In comparison, its US-listed ETF tracking S&P 500 index reached US$59.6 billion in AUM.
She says institutional investors in the region including insurers, and central banks have not traded ETFs. "Many of them only long bonds in their portfolio, so we are expecting a move from holding dollar bonds to holding more bond ETFs."
Meanwhile, mutual funds are also considering replacing swaps and futures with ETFs. In Hong Kong, iShares has only launched one ETF tracking offshore yuan bonds in 2013.
But it might take at least five to six years before such ETFs can build enough liquidity, and while fund managers learn more about including an ETF as a part of their portfolio, Leung says.
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