ChinaAMC launches second RQFII ETF, plans more

China’s largest asset manager will begin trading its second RQFII ETF today, and has started planning its third. Yet investor interest is waning as outflows through July total $1.5 billion.
ChinaAMC launches second RQFII ETF, plans more

China’s largest asset manager will today list its second renminbi qualified foreign institutional investor (RQFII) exchange-traded fund on Hong Kong’s exchange, and is already planning a third.

ChinaAMC’s Hong Kong subsidiary became the first fund house to launch an RQFII ETF a year ago, listing an RQFII fund tracking China’s benchmark CSI 300 index last July.

Others to launch similar products include China Universal Asset Management, Haitong Securities and HuaAn Funds, as well as Da Cheng International Asset Management and Bosera Funds.

ChinaAMC’s latest ETF will track the CES China A80 Index, comprising the 80 largest, most liquid A-shares trading on the Shanghai and Shenzhen stock exchanges.

The firm will use Rmb2 billion ($327 million) of its latest batch of Rmb3 billion quota received from China’s State Administration of Foreign Exchange (Safe) in July for its CES A80 ETF.

ChinaAMC (HK), which manages over $3 billion in total assets, is also planning its third RQFII ETF, a cross-border fund tracking the CES 120, says Freddie Chen, managing director overseeing business development. Chen declined to give a time-frame.

The CES 120 covers stocks in both the CES China A80 Index as well as the CES China Hong Kong Mainland Index, which includes mainland companies listed on Hong Kong’s exchange. 

Yet the firm’s ambitious plans for the RQFII programme come at a time when interest in RMB-denominated ETFs is waning.

The six existing RQFII ETFs have suffered significant outflows since the beginning of the year – according to London-based consultancy ETFGI, outflows totalled $1.5 billion this year to end-July. Notably, $1.3 billion was redeemed from E Fund’s CSI 100 A-Share ETF in the first seven months of 2013, while ChinaAMC’s CSI 300 Index experienced drawdowns of $575.5 million over the same time period.

Despite the outflows, which are primarily from long-only investors, ChinaAMC argues in favour of launching an ETF tracking the CES 80 Index – while indices such as the FTSE A50 mostly cover financial stocks, the CES 80 Index features industrial, health-care, consumer and utility stocks, and as such offers better diversification.

Chen says that regional institutional investors have expressed interest in the firms’ range of RQFII ETFs, although he acknowledges that investors are showing caution when investing in Chinese stocks right now. A market correction earlier this year was severe in the mainland and investors remain wary.

However, once the fund house rolls out its A80 RQFII ETF, investors will be able to hedge their positions, Chen says. He also notes that the valuation is attractive for the A80 – it is priced at 7-8 times forward earnings, lower than the CSI 300, now trading at 10 times its price-to-earnings ratio.

David Lai, a fund manager at China AMC, expects Chinese stock markets to perform better in the second half than in the first, as "profit margins and revenue of cyclical stocks are expected to recover in the second half".

ChinaAMC’s A80 ETF has an expense ratio of 0.99% and management fees of 0.7%. It's traded in both RMB and Hong Kong dollars. The minimum subscription size is 150,000 units in primary markets and 200 units in secondary markets.

The firm is planning to use its remaining Rmb1 billion of QFII quota for mutual fund products, including actively managed equity and bond funds focused on China and listed in Hong Kong, Chen says.

To date, ChinaAMC’s Hong Kong branch has received Rmb21.8 billion in RQFII quota, the largest combined amount by any fund house or asset manager.

Unlike its peers, ChinaAMC has not yet started an RQFII segregated accounts business, although it may consider it in future. 

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