China Universal to list RQFII ETF, plans more

China Universal is readying an RQFII ETF, which it says will offer lower management fees than its peers.
China Universal to list RQFII ETF, plans more

China Universal Asset Management will become the latest fund house to list a renminbi qualified foreign institutional investor (RQFII) exchange-traded fund.

The Shanghai-based firm’s Hong Kong subsidiary plans on using some of the Rmb2 billion ($325 million) RQFII quota it received in May to launch the ETF, which will track China’s benchmark index CSI 300 and start trading on July 8.

It marks the latest move under China’s Rmb200 billion RQFII programme, which has encouraged a number of fund houses to ready RQFII ETFs – products that invest directly into China A-shares.

China AMC launched an RQFII ETF tracking the CSI 300 last July, and market sources say Haitong Securities and HuaAn Funds are planning to roll out similar products soon. Da Cheng International Asset Management and Bosera Funds are also preparing their own RQFII ETFs.

Yang Jian, head of index and quantitative investment at China Universal, admits the timing of the RQFII ETF launch is not ideal. Hong Kong’s Hang Seng Index, which fell nearly 22% from mid-May through late June, while Shanghai’s CSI Index dropped 19% in the same period.

Liquidity squeezes by China’s central bank have contributed to this volatility, and although the central bank has said it will maintain enough liquidity in the markets, sources do not expect large cash injections soon.

As such, investors appear to have lost some appetite for Chinese equities, with outflows from ChinaAMC’s CSI 300 ETF totalling $72 million in May and $52 million in April, according to UK consultancy ETFGI.

Still, the opportunities in China have not changed, Yang argues.

“It may not be the best time [to launch an A-share ETF], but it is certainly not the worst time to enter China,” he says. “The market has stabilised a little bit. [And] on the fundamental side, Chinese equity valuations are not expensive, [especially] given that the Chinese economy still has the potential to grow 7–8%.”

After the launch, China Universal is planning to cross-list the ETF overseas. “We’re now exploring different markets and are in preliminary discussion with related parties,” says Yang, citing the Tokyo Stock Exchange as a possible venue.

China Universal would become the third firm to list such a product on the TSE, with the other ETFs being China AMC’s CSI 300 and the CSOP FTSE A50. Both are listed as Japanese depositary receipts (JDR), instruments issued by a Japanese trust bank recognising ownership of shares in a non-Japanese company.

Compared with the A50 products, the ETFs following the CSI 300, which covers 85% of the A-share market capitalisation, offers investors better exposure across a number of important growth industries in China, namely IT, health care and consumer.

Fees for the existing five products – ChinaAMC CSI300, CSOP FTSE A50, E Fund CSI100, Harvest MSCI A50 and Harvest MSCI A500 – range from 0.6% to 0.99% with total expense ratios of 0.8% to 1.15%.

China Universal’s CSI300 ETF will charge a lower management fee of 0.5%, with an estimated TER of around 0.79%, making it an “economic [option for investors] with minimum tracking error”, he says. Eight firms are interested in investing in the ETF once it begins trading, adds Yang, declining to name them.

The minimum subscription for China Universal’s ETF is 200 units in the secondary market and 300,000 units in the primary market. It will be traded in both RMB and Hong Kong dollar.

Yang joined China Universal in January from Citigroup Global Markets to help build up the mainland firm's index and quantitative investment business.

The firm is mulling introducing sector-focused funds as well as value- and growth-focused ETFs. However, these probably won’t come to fruition for some time, notes Yang, as global investors are more interested in broad exposure to China for the time being.

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