China’s securities regulator has cleared a path for four fund houses to list the first physically backed A-share ETFs in Hong Kong under the expanded RQFII scheme, sources confirm.
The China Securities Regulatory Commission gave verbal approval to China AMC, Harvest Global Investments, E Fund and CSOP as they seek to list products in Hong Kong tracking the CSI 300, MSCI A-Shares, CSI 100 and A50 indices, respectively.
The four subsidiaries have already submitted their product applications to Hong Kong’s Securities & Futures Commission (SFC), but they needed the CSRC to rubberstamp their suitability in a more rigorously policed second batch of RQFII quotas.
Unlike the first batch (Rmb20 billion released last December), which were shared by 21 Hong Kong subsidiaries of Chinese fund managers and securities firms, the second batch (Rmb50 billion released on April 3 this year) will only be granted to a few experienced managers.
It is understood the CSRC is being more cautious in approving managers in the second batch and is giving priority to firms with experience and track record in managing ETFs domestically.
Four securities brokers – Haitong, Guosen, Guotai Junan and Essence – were also invited to Beijing to pitch their A-share ETF proposals, but are still waiting to hear back from the CSRC.
One mainland fund house, which declined to be named, notes that the homogenous nature of the first batch of RQFII products – balanced funds up to 80% exposed to fixed income and 20% to equity – led to lacklustre fundraising results, with subscription periods having to be extended.
“Compared with the first batch of RQFII products, which have an almost identical investment strategy, each fund in the second batch is meant to be designed differently,” a source says.
Industry speculation suggests that the CSRC’s intention with the second batch is to support the growth of physically backed A-share ETFs, given concerns over counterparty risk that have been raised over synthetic equivalents.
But it is not clear what sort of quota each manager will be granted. “The Rmb50 billion may not be given away all in one shot as the regulator will likely monitor the growth of these ETFs,” adds the source. “If one manager proves it can run its ETF successfully, it might be awarded more of the quota. It is also possible [the regulator] might increase aggregate quota to support growth.”
However, some industry players argue that onshore China experience in managing ETFs is not especially relevant when it comes to launching a Hong Kong product.
“The ETF market structure in mainland China is different as there is no market-maker, which plays a significant role in Hong Kong,” says a second anonymous source. “The key is whether they find enough market-makers to work with them.”
One additional feature the new RQFII A-share ETFs will share is daily foreign exchange liquidity, compared with monthly liquidity in the qualified foreign institutional investor (QFII) scheme.
However, whether this provides enough of an incentive to investors to challenge existing synthetic products in the market remains to be seen, given that a significant portion are institutions that use US dollar-denominated A-shares for hedging purposes.
“The biggest disadvantage of the iShares A50 ETF is its premium,” adds the second source. “If the premium narrows, then the new physical ETFs will likely have less appeal to institutional investors.”