Two Chinese fund houses are readying what will be the third and fourth onshore gold ETFs available to Chinese investors after approval from the securities regulator.
Bosera Asset Management and E Fund Management secured approval from the China Securities Regulatory Commission (CSRC) in July to roll out gold ETFs. It follows hot on the footsteps of the first two products, launched by Guotai Asset Management and HuaAn Fund Management.
The liberalisation marks an important shift in the mainland, as it allows Chinese investors to diversify away from jewellery and physical gold for the first time and join the global gold ETF universe, which was worth $157 billion at the end of last year.
Yet global sentiment on the yellow metal has waned of late, with the price down 17% year-to-date, with gold prices closing at $1,371 an ounce on August 20 from $1,657 per ounce at the start of the year.
Still, gold supporters argue that the addition of onshore gold ETFs, in addition to overseas-listed ETFs available under the qualified domestic institutional investor (QDII) programme, will stir competition in a country that loves gold. China is the world's biggest gold consumer after India and is forecast by the World Gold Council to overtake it this year.
There are four fund houses in China with QDII licences to invest in offshore gold ETFs: E Fund Management, Harvest Fund Management, Lion Fund Management and China Universal. That means that E Fund Management will be the only fund house in China offering both onshore and offshore exposure to gold via an ETF.
Management fees for QDII funds investing in offshore gold ETFs are higher than for domestic ETFs – fees for investing in overseas gold ETFs range from 1-1.5%, according to Morningstar, compared with 0.5% fees charged by Guotai and HuaAn.
In addition, onshore Chinese ETFs provide same-day liquidity, as opposed to QDII funds, which can take as much as 10 days for investors to get their money back.
As such, domestic gold ETFs are expected to receive most demand initially from mainland investors, says Deng Hu, an ETF analyst at Shanghai-based Shenyin Wanguo Securities Research. Still, he stresses that QDII funds will remain attractive for investors seeking overseas exposure.
Fang Weiling, an ETF fund manager at Bosera Asset Management, notes that gold ETFs and QDII funds investing in gold are not “in a position to compete or replace each other” because they are traded in different markets and use different currencies, which can lead to varying prices.
“China’s gold ETFs are denominated in RMB, and when gold imports cannot fulfil excess demand, the price may rise, and be higher than other countries. QDII funds are heavily invested in gold ETFs and funds which trace gold performance out of London and the US,” notes Fang.
Seven QDII funds are invested in State Street Global Advisors’ SPDR Gold Trust, the world’s largest gold ETF at $76 billion as at the end of March this year.