New China ETF Designed to Profit From Hong Kong-Shanghai Gapby
CSOP fund picks cheaper stocks among dual-listed Chinese firms
Arbitrage becomes difficult after China curbs shortselling
The first Chinese asset manager to offer U.S. investors an exchange-traded fund tracking mainland equities has introduced a new ETF intended to profit from the almost 30 percent price difference between dual-listed stocks in Hong Kong and Shanghai.
CSOPAsset Management Ltd.’s China CSI 300 A-H Dynamic ETF picks the cheaper stocks from the group of companies that have listings both in Hong Kong and on the mainland. On average, the so-called A shares of dual-listed companies are trading at a more than 29 percent premium to their counterparts in the former British colony, according to data compiled by Bloomberg.
Investors can combine the new ETF with other funds to create a paired trade that will pay off if the valuation gap between two markets converges. That would entail buying the cheaper stocks in Hong Kong using the CSOP ETF and selling short the same and more expensive shares on the mainland through another fund such as Deutsche Bank AG’s A-Shares ETF, which tracks the Shanghai Shenzhen CSI 300 Index.
“We see HAHA as the next generation of investing for U.S. based investors, as it combines two markets that have been historically separate for many investors,” Matt Collins,head of U.S. capital markets at the Chinese asset manager in New York, said in an interview, referring to the ETF’s ticker on the New York Stock Exchange.
The new ETF starts trading at a time when China’s crackdown on short selling in recent months following an equity rout has made arbitrage investing more difficult in the local market, preventing investors from betting against expensive mainland stocks.
About 20 percent of the members in the CSI 300 benchmark are dual-listed companies, including Bank of Communications Ltd. and China Railway Group Ltd. Bank of Communications, China’s fifth-largest lender, closed at 6.40 yuan ($1.01) on Monday, or 32 percent above where it trades in Hong Kong. CSOP is seeking to let investor take advantage of arbitrage opportunities such as these, allowing to make money when the two prices converge.
Hong Kong-based CSOP and Deutsche Bank’s wealth-management unit also both started trading of their ownyuan-hedged ETFs on Tuesday, allowing investors for the first time to buy local stocks without exposure to the currency risk. Demand for yuan hedging has increased after a surprise devaluation in August increased the volatility of the Chinese currency.
The CSOP fund tracks MSCI Inc.’s benchmark for China A shares while the Deutsche Bank ETF follows the CSI 300 index.