Note Sales Tied to China Stock ETF at Record on Growth Optimism
Structured-note issuers are selling a record number of securities tied to BlackRock Inc.’s exchange traded fund tracking top Chinese stocks as investors betting on the nation’s growth seek to unlock gains in its equities market.
Offerings of notes solely tied to iShares FTSE A50 China Index ETF totaled at least 14 as of Feb. 7, led by JPMorgan Chase & Co., poised to surpass combined issuance in the two years since the securities were first sold in 2010, according to Bloomberg data. The fund, created by BlackRock’s iShares unit and traded in Hong Kong, mimics the performance of China’s 50 biggest so-called A-share stocks listed on Shanghai and Shenzhen exchanges that are off limits to most foreigners.
Global investors are seeking exposure to Chinese assets after the country’s economy accelerated last quarter for the first time since 2010. Speculation that growth will accelerate further has pushed the value of the iShares ETF to its highest level in 18 months.
“Back in the beginning of 2012, people raised concerns about further growth in China,” said Manuel Duerr, who oversees distribution of structured products to individual investors at EFG Financial Products AG. “One year later, we see again increasing interest in China-related investments on the client side.”
EFG sold notes linked to the ETF in four offerings for Asian investors last month, Duerr said. The Zurich-based structured-product distributor issued the second-most securities tied to the fund after JPMorgan, which led sales with six placements, according to Bloomberg data.
The iShares ETF recovered from a three-year low as China’s gross domestic product expanded 7.9 percent in the three months through December, up from 7.4 percent in the previous period. The fund managed HK$68.7 billion ($8.9 million) as of Feb. 5 after trading volume jumped 22 percent last year, according to Bloomberg data. The high liquidity is one factor drawing investors from as far afield as Europe, Duerr said.
The fund has become popular because of mainland rules limiting foreigners’ purchases of yuan-denominated indexes or stocks, and a limited availability of the Chinese currency outside the nation, said Edmond Lee, a Hong Kong-based director overseeing development and sales of equities derivatives at Societe Generale SA. A tax exemption for the fund is another factor drawing investors, he said.
“Everyone can buy that as long as you have a stock account,” Lee said in a phone interview. “It’s a very convenient tool for people interested in the A-share market.”
Hana Daetoo Securities Co., a South Korean brokerage, is among issuers seeking to follow JPMorgan in benefiting from the gains in Chinese stocks. The company is preparing to issue its first publicly offered securities tied to the ETF, Yoon Moon Han, deputy manager for product development, said in a phone interview.
In Hong Kong, an increasing number of callable bull and bear contracts, which let investors make directional bets on the underlying stocks or indexes to generate returns mirroring the movements in the reference assets, are tied to the ETF. Issuance totaled 24 this year as of Feb. 5, after rising 13 percent to 178 last year, according to Societe Generale data.
“The A-shares market started to rebound,” Societe Generale’s Lee said. “Retail investors and some institutions are rushing into the market to grab the chance.”
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