DB Plans Share-Owning China ‘A Shares’ ETF

Deutsche Bank filed regulatory paperwork proposing to bring to market a fund that would allow investors direct access to actual China A shares, a coveted corner of the investment world so far only accessible to ETF investors with significant constraints.

The db X-trackers Harvest CSI 300 Index ETF will track the CSI 300 Index, a benchmark of the 300 largest, most liquid securities from the top of China’s A-share market. China A shares cover Chinese companies incorporated on the mainland and whose renminbi-denominated shares trade in Shanghai or Shenzhen.

It’s important to note that accessing China A shares directly isn’t actually possible for foreign investors at this time, so this fund may take a considerable amount of time to come to fruition. It appears Deutsche is preparing for a future of investing in China that hasn’t yet come to pass.

Only one other ETF exists that taps into the China A-shares market via the CSI 300—the Market Vectors China ETF (PEK), sponsored by New York-based Van Eck Global. Crucially, however, PEK accesses A shares via derivative securities, exposing investors to the inherent risks of any equity investment plus so-called counterparty risks associated with use of over-the-counter derivatives.

This type of counterparty risk hasn’t given investors’ interest in PEK pause. The fund pulled in $22 million over the last year—more than half of its current assets of nearly $40 million, according to data collected by IndexUniverse.

The A-shares market is in some ways considered to be the next great frontier of investing in the world’s No. 2 economy, and would build on the success of such ETFs as the nearly $8 billion mega-cap iShares FTSE China 25 Index Fund (FXI) that has provided access to Hong Kong-listed companies. The allure of a less-than-ideal product such as PEK speaks to the demand of the A-shares market.

Strict Gatekeeping

More broadly, accessing China’s A-share market is no simple task for foreign investors, who must first apply and be approved, for renminbi qualified foreign institutional investors (“RQFII”) status.

Then, China’s State Administration of Foreign Exchange (“SAFE”) will grant investment parties a specific aggregate dollar amount investment quota. The investment parties can then freely invest in A shares up to their specified quota.

Harvest, a management company in China with whom Deustche Bank is working on a subadvisory level with this fund, has obtained RQFII status.

Deustche Bank has so far filed for two other funds in 2013: a long-term muni bond fund in early February, and a utilities ETF at the end of January.

This third fund, onto which the bank has yet to pin a ticker or cost, would be primarily traded on Arca, the New York Stock Exchange’s electronic platform.

 

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