E Fund Management (HK) is to break new ground today by listing a cross-market exchange-traded fund in Hong Kong that can be traded in both HK dollars and renminbi – the first of its kind.
The renminbi-denominated qualified foreign institutional investor (RQFII) vehicle will track the CES China 120 Index, comprising of 120 A- and H-share stocks listed in Hong Kong, Shanghai and Shenzhen. The ETF’s constituents account for 54.5%, 36.4% and 9.2% of the CES China 120, respectively.
At present there are eight RQFII ETFs tracking only A-shares through various indices, including the CES A80, the CSI300 and the FTSE A50. These products are proving popular as RQFII ETFs have physical underlyings that allow investors to gain exposure to onshore Chinese stocks without the counterparty risk of synthetic versions. The market in general is seen as burgeoning with potential.
These products target both the institutional and retail market, and Tseng Ko, managing director of E Fund (Hong Kong), says he is targeting both types of investors via its new vehicle.
He notes that E Fund is talking to pension funds and insurance companies in Singapore and Malaysia, and plans to meet institutions in South Korea and Taiwan.
The cross-market nature of this ETF allows investors to diversify Greater China market risk, which Tseng sees as appealing to long-only investors in particular.
He says it has already secured Rmb390 million in seed money from investors ahead of the launch. The fund house is aiming to raise Rmb2 billion by the middle of next year, and believes it can grow to Rmb4 billion ($656 million) within a few years.
Tseng is busily meeting regional and global investors, having just returned from a trip to Europe. “European investors are keen on China’s market,” Tseng tells AsianInvestor. “They still have a lot of questions and it takes time for them to understand the markets.”
The minimum investment threshold for the ETF is Rmb1,000 in the secondary market, making it affordable to all investors.
However, its total expense ratio will be about 1.15%, which is at the top end for existing RQFII ETFs, which go as low as 0.79%.
Tseng explains that tracking stocks listed in different markets is complex, raising the costs. Nevertheless, he expects the ratio to fall as the fund’s AUM rises.
The State Administration of Foreign Exchange allocated Rmb2 billion to the fund last August.
The ETF has 13 participating dealers: ABN Amro, China Everbright, China International Capital Corporation, China Merchants Securities, Citic Securities, Citigroup Global Markets, GF Securities (HK), Goldman Sachs, Haitong International, Merrill Lynch, Nomura International, SG Securities and Yuanta Securities.
The market-makers for the Hong Kong dollar counter are Bluefin, CICC, Nomura International and SG Securities; for the RMB counter they are Bluefin, CICC, Citic Securities and Nomura International.
The RQFII programme was launched in December 2011 to allow the Hong Kong subsidiaries of mainland fund managers to invest back into the onshore securities market.
An initial quota of Rmb20 billion was permitted, with regulations stipulating that no more than 20% would be invested in equity and no less than 80% in fixed income.
That was expanded in April last year by Rmb50 billion, with RQFII permit holders allowed to deploy their quotas into exchange-traded funds.
In March this year, the programme was further expanded to include Hong Kong domiciled financial institutions.