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China ETFs set to receive boost

We look at the exchange traded funds that could benefit
November 21, 2014

Monday saw the launch of the Shanghai Hong Kong Connect programme, which will connect Chinese mainland 'A' shares to the Hong Kong stock market and allow foreign investors, such as China funds, to trade Shanghai shares.

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The 'A'-share market comprises of around 2,500 companies, listed on Shanghai and Shenzen exchanges, worth in total around $3.8 trillion, though only 568 Shanghai stocks are tradable through the Connect programme. A shares arguably give better exposure to domestic Chinese growth.

"This will open the door for international investors to access a lot of good quality consumer and healthcare companies historically only available in China," says Jian Shi Cortesi, fund manager at Swiss & Global Asset Management. "Companies of interest include the popular Chinese rice wine producer, Kweichow Moutai Company, automobile manufacturer SAIC Motor Corp, and Tasly Pharmaceuticals, a manufacturer of traditional Chinese medicine, which currently don't trade in Hong Kong."

Until now foreign investors have not been able to invest in mainland shares unless they have been granted a quota under the Qualified Foreign Institutional Investor (QFII) scheme. 'China' funds that don't have a QFII quota invest in markets such as Hong Kong and Taiwan, but they may now increase their holdings of A shares.

If the A share market opens up sufficiently to make it into the global market indices of FTSE, MSCI and other providers, it would mean greater exposure through both global index tracker funds, and global active funds, which use these indices as benchmarks. Index provider MSCI, for example, has ruled out including Chinese mainland A Shares in MSCI China this year, but will review this possibility again in 2015.

Some commentators believe the programme could offer a long-term boost for Chinese equities. "Whilst carrying a higher risk premium than other markets, China could be emerging as an interesting opportunity for those with a long-term investment horizon, particularly since it remains largely unloved as a region," says Mona Shah, portfolio manager, Rathbone Multi-Asset Portfolios. "A combination of China's out of favour status and willingness to drive an open economy could make this an interesting entry point for those with a long-term investment horizon and a stronger appetite for risk."

"There are good reasons to invest now - the liberalisation will undoubtedly allow more investment into China," says Adam Laird, passive investment manager at Hargreaves Lansdown. "Also, manufacturing and construction are important industries within China, both of which will benefit from current low commodities prices."

 

Best mainland China ETFs

UK investors can access mainland China shares via exchange traded funds (ETFs) listed in London. These include IC Top 50 ETF db x-trackers Harvest CSI 300 Index UCITS ETF (RQFI). The CSI 300 index gives a broad exposure to domestic Chinese small and medium-sized stocks listed in Shanghai. It has a broad spread of industrial, healthcare and durable goods companies. It has an all in fee of 1.1 per cent and it uses physical replication - it buys the shares it invests in.

db X-trackers Harvest CSI300 Index UCITS ETF top 10 holdings (%)

PING AN INSURANCE GROUP3.4
CHINA MERCHANTS BANK2.9
SHANGHAI PUDONG DEVELOPMENT BANK2
HAITONG SECURITIES 1.6
YUAN RENMINBI1.3
BANK OF COMMUNICATIONS1.1
AGRICULTURAL BANK OF CHINA1.1
SAIC MOTOR CORP1.0
PING AN BANK CO1.0
CHINA EVERBRIGHT BANK0.9

Source: db X-trackers

 

CSOP Source FTSE China A50 UCITS ETF (CHNP), meanwhile, aims to deliver the return of the FTSE China A50 Index which comprises the 50 largest companies listed on the Shanghai and Shenzhen stock exchanges, weighted by free float market capitalisation. It buys shares in the index it tracks and has an ongoing charge of 1.15 per cent.

However, while some companies' A Shares have traded cheaper than their overseas listings, there are some cases where the overseas shares were trading cheaper. "There may be some sectors where domestic Chinese share prices fall," says Mr Laird. "Also, A Shares ETFs can still be expensive to buy - ETFs have higher management costs and they tend to have higher bid offer spreads."

And Ms Shah warns that investing in China involves risks including liquidity and volatility, and progress on corporate governance issues will be slow and may remain a barrier for investors. "The main Shanghai Composite index is complex and heavily weighted towards the banks," she adds. "There are also short to medium-term risks presented by the Shanghai Connect Programme, such as higher settlement fees."