CSOP Asset Management delayed its US listing of an ETF by months because of an RQFII quota shortage, the fund manager has revealed to AsianInvestor.
The firm finally became the first Chinese manager to independently list an exchange-traded fund in the US last week, after earlier declaring it would launch in June 2014, as reported.
The Hong Kong-based fund house, a subsidiary of China Southern Asset Management, said it made the move without a partner because of the importance with which it regards the US market.
CSOP listed an ETF tracking the FTSE China A50 index on the New York Stock Exchange last Thursday. The US-domiciled fund has raised $237 million in the IPO, and will invest in onshore China A shares using the renminbi denominated foreign qualified institutional investor (RQFII) scheme and the Shanghai-Hong Kong Stock Connect.
The listing was delayed by several months mainly because of a shortage of RQFII quota and a modified business plan.
Jack Wang, the firm’s managing director and head of sales, said CSOP’s RQFII quota was extremely tight in the second half of last year. This meant its Hong Kong-listed A50 ETF could only allow limited unit buying at the time, a restriction which would have been a liquidity concern for US investors. To make things worse, Hong Kong used up its RQFII quota of Rmb270 billion last September, meaning fund managers could not apply for fresh quotas.
To overcome this problem, CSOP changed strategy last November by buying Shanghai-listed shares via the newly-launched Stock Connect, which freed up RQFII quotas which had been allocated to A shares.
The A50 ETF announced plans to invest up to 30% of its net asset value via Stock Connect from November 17, but a new investment policy on February 13 saw it change its maximum permitted allocation to 100%.
The US fund’s China A50 index comprises four Shanghai-listed stocks and eight Shenzhen-listed stocks, with the latter representing 12.75% of the weighting.
“The Stock Connect scheme provides flexibility for our investments,” said Wang, “but we would like to free-up RQFII quota and utilise it in an effective way.” In Hong Kong in January the firm listed an ultra-short-term bond fund in Hong Kong which invests in onshore bonds via RQFII quotas.
CSOP’s new fund will initially invest 100% of its funds via RQFII, but the firm plans to later add Stock Connect purchases to the mix.
“The advantage of RQFII is stability - we can make sure we are buying enough stock to replicate the index return – but Stock Connect has the uncertainty of a limited daily quota,” Wang said. The fund will be able to invest in Shanghai stocks via Stock Connect but could only buy Shenzhen shares via RQFII.
Another unique feature of CSOP’s US listing is its decision to launch on its own, without a partner. Wang said this decision was made because of the US market’s huge potential.
“We changed our plan last September and decided to launch this fund independently in the US, because we see the US as an important market for our business development,” said Wang.
This makes CSOP the first Chinese manager to list an ETF on its own. The firm is establishing its local office and sales team in the US, but Wang stressed that the operations and investment decisions will be made in Asia.
CSOP teamed up with ETF provider Source to list an A50 Ucits ETF in London in January 2014. Most Chinese managers adopt a partnership model when expanding overseas, such as Harvest Global Investments and Deutsche Asset & Wealth Management, China AMC (HK) and Van Eck Global, E Fund (HK) and Krane Funds Advisors, or GF International and Global X.
CSOP was established in 2008. It had total assets under management of $7.08 billion as of the end of 2014, and holds a total RQFII quota of Rmb46.1 billion as of September last year.