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Hong Kong’s A-Share ETF Raises Six Times Synthetic Rival

Demand for the first Hong Kong exchange-traded fund backed by stocks listed in mainland China pushed the security’s market value to six times that of a similar ETF that uses derivatives.

The China AMC CSI 300 Index ETF has 3.8 billion yuan ($596 million) in assets after listing on July 17, compared with HK$838 million for the iShares CSI 300 A-Share Index fund, which started in November 2009. The physical ETF’s market value is capped by mainland regulators at 5 billion yuan.

The security is the first to give investors who don’t have special permission to invest in the Chinese companies access to returns that are backed strictly by gains and losses in mainland shares. It acquires the stock through the Renminbi Qualified Foreign Institutional Investor quota granted by mainland authorities. The 24 other A-share ETFs listed on the exchange trade in Hong Kong dollars and use derivatives to replicate the indexes, according to a July 16 statement from Hong Kong Exchanges & Clearing Ltd.

“Investors welcome this genuine Asian ETF, because it’s backed by physical shares,” said Ben Kwong, chief operating officer at KGI Asia Ltd. in Hong Kong. “The synthetic shares had been popular before, because there was no substitute. It provides a good vehicle to invest.”

More than 4.7 million units of the RQFII fund changed hands yesterday, 33 times as many the synthetic iShares ETF. The China AMC fund rose 0.4 percent to 24.3 yuan yesterday while the synthetic security gained 0.5 percent to HK$21.50. The CSI 300 benchmark index that underlies both gained 0.01 percent to 2,414.33.

Investor Warnings

Counterparty risk associated with derivatives in a synthetic ETF should be absent in the new product. It carries its own type of risk given the untested nature and the fact that mainland regulators may step in or revise guidelines, the Hong Kong Securities and Futures Commission said on its website.

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.

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. The Hong Kong bourse began listing yuan-denominated IPOs in 2011 and this year cut its lunch break to more closely align with China’s trading day.

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.

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