Hong Kong-based CSOP Asset Management and UK exchange-traded product provider Source yesterday listed the first Ucits RQFII ETF on the London Stock Exchange.

In doing so, they have pipped Deutsche Asset & Wealth Management and Harvest Global Investments to the post, after the latter two firms received approval for a Luxembourg RQFII ETF in November. DeAWM and Harvest plan to list the product in London on January 16.

The Dublin-domiciled CSOP Source FTSE China A50 Ucits ETF gained approval from the Irish central bank in December and raised Rmb1.42 billion ($235 million) from an IPO on January 6. This came after CSOP received Rmb1.5 billion in quota from China’s State Administration of Foreign Exchange (Safe) in November.

CSOP and Source plan to apply for additional quota for the RQFII ETF soon, says Jack Wang, managing director of the institutional clients group at CSOP. The manager also aims to list the ETF in Switzerland and Frankfurt, he tells AsianInvestor.

The two firms have signed four participating dealers for the product and are in talks with others. They will target institutional investors, as it sees Europe as a relatively fragmented retail market.

They chose to domicile the ETF in Dublin as a tax treaty between China and Ireland allows an Irish entity to enjoy tax benefits related to investment in China.   

However, uncertainty over whether China will charge a 10% capital gains tax (CGT) on QFII and RQFII funds is becoming an issue as the programmes expand. While the 10% levy has not yet been enforced by the State Authority of Taxation (SAT), some fund houses are setting aside provisional reserves.

Rather than earmarking 10% of the ETF’s portfolio, CSOP will set aside the CGT on the real estate stocks in the FTSE A50, as they make up 10% of the index.

Yet setting aside money in anticipation that the SAT will start charging CGT is burdensome, especially for RQFII ETFs. The decision to withhold 10% of CGT could increase the tracking error of such products, says an executive at the Hong Kong unit of a mainland fund house.

Wang agrees that holding smaller cash reserves would reduce the tracking error; in this case to less than 1%. (The Hong Kong-listed CSOP FTSE China A50 ETF has an NAV tracking error of 1.775%, according to Bloomberg.) 

Having received Rmb4 billion of new quota on December 24, CSOP has a total of Rmb30.1 billion in RQFII quota, making it the biggest RQFII player. The firm will use Rmb2 billion for the existing Hong Kong-listed FTSE A50 ETF, and the remaining Rmb2 billion will be used for new products.

Wang declined to offer details as the firm is awaiting regulatory approval.

HSBC is the custodian for the fund and also provides it with securities services including trusteeship, global custody, fund accounting and transfer agency. The bank had helped CSOP to obtain the Rmb1.5 billion in RQFII quota.

Overseas listing of RQFII ETFs is a nascent but growing trend. In addition to the db X-trackers Harvest CSI 300 Index Ucits ETF planned for launch in London, DeAWM and Harvest also listed the first RQFII ETF in New York in November. It tracks the CSI 300 and had $200 million in assets as of the end of 2013.