Europe Lists First Chinese Equity ETF

Terry Flanagan

Deutsche Asset & Wealth Management and Harvest Global Investments have launched an exchange-traded fund which allows European investors to directly invest in domestic Chinese companies for the first time, after launching a US version last year.

In Europe the db x-trackers Harvest CSI300 Index UCITS ETF became available for investment on January 7. The ETF will list on the London Stock Exchange and Deutsche Börse on January 16 but the bank is also looking at other possible venues according to Marco Montanari, managing director and head of passive asset management, Asia Pacific at Deutsche Asset & Wealth Management Hong Kong.

Deutsche Asset & Wealth Management said in a statement that it is the first UCITS-compliant direct replication Chinese A-shares fund on the CSI300, and the first of its kind to be approved by a European regulator. Other ETFs access China A-shares through derivatives or other instruments.

Montanari told Markets Media: “The European listing has raised $95m so far compared to $108m in the US so the level of interest has been very similar and we are very optimistic.”

The ASHR ETF  was the largest ETF launch since 2007 and has more than doubled total net assets to $214m by 7 January 2014 according to Deutsche’s website.

Montanari expects rapid growth of ETF assets invested in Chinese equities as the country’s economy continues to expand. “European and US investors have less than 2% of equity ETF assets invested in China. In five to ten years time this should logically be more than 10% so our first mover advantage is really important,” he said.

In both Europe and the US Deutsche worked with Harvest Global Investments Limited, a subsidiary of the bank’s asset management joint venture in China.

A-shares are equities issued by companies incorporated in mainland China, and denominated and traded in renminbi. The Chinese government limits direct investments in A-shares from foreign investors who have to be approved by regulators. Harvest Global Investments Limited is approved as a Renminbi Qualified Foreign Institutional Investor allowing it to obtain a RQFII quota for the ETF. The two new  ETFs the 300 largest and most liquid securities on the Shanghai and Shenzhen Stock Exchanges.

“The US and European launches are part of a long-term project as we are aiming to introduce other Chinese products and own the Chinese space,” added Montanari. “We already have the largest amount of assets, over $1bn, in synthetic ETFs and want to give global investors access to the physical Chinese market.”

In July 2012 Deutsche Asset & Wealth Management listed Europe’s first ETF providing synthetic exposure to the CSI300 Index which has $950m in net assets.

Montanari said European investors now prefer physical ETFs and the new product launch follows DeAWM’s announcement in December that it would convert a number of its current ETFs from synthetic to physical.

Synthetic ETFs use derivatives to duplicate performance while physical track specific indexes and their underlying shares. Last year the International Organisation of Securities Commissions (IOSCO) warned of potential conflicts of interest in synthetic ETFS if the asset manager enter into derivatives with affilaited counterparties, such as a bank, and that the quality of collateral posted for over-the-counter derivatives transactions may be too low.

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