Cash & Liquidity ManagementInvestment & FundingCapital MarketsChinese ETFs Closed to New Investors

Chinese ETFs Closed to New Investors

Strong international demand for Chinese equities has forced some providers of exchange traded funds (ETFs), including Deutsche Bank, to close products to new investment, reports the
Financial Times
.

The business daily said that many China-related ETFs rely on the renminbi (RMB) qualified foreign institutional investor (RQFII) scheme, a quota system through which China grants access to its markets, in order to buy the mainland assets underpinning the funds. The programme, which runs parallel to a US dollar-denominated scheme, launched in 2011 and is designed to encourage wider use of the Chinese currency.

China allocated RQFII quotas to several financial centres, including London and Singapore, but Hong Kong remains the centre for RQFII investment with a quota of RMB270bn (around US$44bn or £27bn). RQFII quotas are given to institutional investors and asset managers either to invest their own capital onshore – both in stocks and bonds – or to launch new fund products.

Analysts cited by the
FT
say the Hong Kong investment pool is being rapidly exhausted, partly thanks to weeks of high inflows into RQFII funds. Assets held by ETFs alone have almost doubled this year to US$12.6bn.

Deutsche Bank has started rationing US access to its Chinese ETFs that invest using the RQFII scheme, and has temporarily closed similar funds altogether to new money from European clients. The bank blamed ‘high investor demand’ and said it would continue to work with mainland authorities in order to get further quota. Its synthetic ETFs, which track Chinese stocks using derivatives, are unaffected.

Since the start of the year, investors have added almost US$6bn to RQFII-based ETFs, according Deutsche Bank’s data. One of the bank’s China tracker funds has grown from less than US$100m in assets at the start of the year to more than US$500m now. The
FT
reports similar activity elsewhere -the size of a fund at another large Chinese asset manager, China AMC, has increased more than tenfold this year.

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