July 17 (Bloomberg) -- The first foreign exchange-traded fund backed by stocks listed only in mainland China is scheduled to begin trading today in Hong Kong.
China Asset Management Ltd. received approval from the Hong Kong Securities and Futures Commission to list the ETF, it announced in a statement July 9. The security tracks the China AMC CSI 300 Index via so-called A-shares purchased with yuan raised outside China. The shares are acquired through the Renminbi Qualified Foreign Institutional Investor quota granted by mainland authorities.
The fund will be the first to give investors who don’t have special permission to invest in the Chinese companies access to returns that are determined strictly by gains and losses in mainland shares. The 24 other A-share ETFs listed on the exchange use derivatives to replicate the indexes and are traded in Hong Kong dollars, according to a July 16 statement from Hong Kong Exchanges & Clearing Ltd.
“This is an important development to further strengthen HKEx’s position as a leading international market to trade RMB products by offering more direct access for Hong Kong and international investors to gain exposure to the Mainland A-share market,” Calvin Tai, head of trading at the bourse, said in the statement.
Three more physically backed A-share ETFs will be approved by the SFC, Ming Pao Daily reported July 16, citing Alexa Lam, deputy chief executive officer of the SFC. E Fund Management Co., CSOP Asset Management Ltd. and Harvest Global Investments will create yuan-denominated funds with a 5 billion yuan ($784 million) quota each, the paper reported.
While the counterparty risk associated with the derivatives in a synthetic ETF should be absent in the product launched today, the SFC warned investors that its untested nature may make it riskier than traditional exchange-traded funds.
“The RQFII program is still at a pilot stage,” the SFC said on its website. “The uncertainty and change of the laws and regulations on the Mainland (including the RQFII policy and rules) may adversely impact the RQFII A-share ETFs.”
The new funds are part of a push by China to open its capital markets and by Hong Kong to cement its position as the bridge to the mainland. The China Securities Regulatory Commission approved the first two Shanghai- and Shenzhen-listed ETFs tracking Hong Kong indexes on June 30. Hong Kong began listing yuan-denominated IPOs in 2011 and this year cut its lunch break to more closely align with China’s trading hours.
Hong Kong Exchanges has bid 1.39 billion pounds ($2.16 billion) for London Metal Exchange, the world’s biggest commodities market. It says it will increase the commodity bourse’s revenue in part by tapping the large potential base of customers in China, which accounts for about 40 percent of consumption of commodities globally and only as much as 25 percent of trading on the LME, the company said when announcing the deal.
--Editors: Chris Nagi, Michael P. Regan