China A-Shares ETFs Soar On Cross-Border Trading Link [Market Vectors ETF Trust, KraneShares Trust]

china etfsSweta Killa:  The long-awaited trading link between Hong Kong and Shanghai has finally received approval from the regulators on Monday. This give both Chinese and foreign investors permission to trade across each other’s stock exchanges. The news pushed Chinese stocks higher with the Hong Kong’s Hang Seng Index climbing about 1.2% and the Shanghai Composite Index rallying over 2% so far this week.

The so-called Shanghai-Hong Kong Stock Connect program allows retail investors around the globe to invest in mainland Chinese equities for the first time, effective November 17. Global investors could now have an easier access to the Chinese stock market which has a total market value of $3.9 trillion.

The trade link is the part of China’s efforts to promote its tightly controlled currency (yuan) in Hong Kong and turn Shanghai into an international financial hub. It will likely result in more capital inflows into the country and certainly lift its dwindling economy. As per the French bank BNP Paribas, the trading link could boost the average stock trading in Hong Kong by about 38% by 2015 and create the world’s third largest stock exchange.

The effect of higher trading has already been felt on the Shanghai Composite Index where more than RMB 330 billion ($54 billion) shares changed hands in yesterday’s session, creating a new record since 2005.

Market Impact

While the cross-border trading link spurred a rally in most of the Chinese stocks this week, the China A-Shares are the largest beneficiaries. A-Shares are issued by companies headquartered in mainland China and are traded in RMB on Shenzhen or Shanghai stock exchanges. These can usually only be purchased by domestic Chinese investors due to high regulation, though some foreign investors could trade through Qualified Foreign Institutional Investors or Renminbi Qualified Foreign Institutional Investors.

When the Stock Connect deal comes into effect next week, foreign investors will have easy access to the bourses for trading purpose. Trading volume on the Chinese stock exchanges is likely to get a lift from this, suggesting surging stock prices in the days ahead. The smooth trading can also be felt in the China A-Shares market of the ETF space.

In particular, PowerShares China A-Share Portfolio (CHNA), Market Vectors China ETF (PEK), Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) and KraneShares Bosera MSCI China A Share ETF (KBA) have gained 3.9%, 3.1%, 3% and 2.7%, respectively, so far this week (read: iShares Plans to Enter China A Shares ETF Market).

CHNA

This is an actively managed ETF providing exposure to the China A-Share market using Singapore exchange FTSE China A50 Index futures contracts. The product is unpopular and illiquid with AUM of $2.5 million and average daily volume of under 2,000 shares. It charges 51 bps in fees per year from investors.

PEK

This fund tracks the CSI 300 Index and holds a large basket of 301 stocks. The portfolio is well spread out across various securities with none holding more than 3.3% of assets. From a sector look, more than one-third of the portfolio is allotted to financials, followed by industrials (14.2%) and consumer discretionary (11.1%).

The fund has amassed $30.8 million in its asset base and charges 72 bps per year. Volume is light as it exchanges about 9,000 shares per day on average.

ASHR

Though this ETF is similar to PEK tracking the same index and having common holdings, it is relatively popular and liquid in the China A-shares market with AUM of $469.1 million and average daily volume of around 373,000 shares. However, the fund is costlier by 10 bps.

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