Friday, August 3, 2012

First Cross-Border RMB ETF (Stock Code Analysis: RQFII A-share CSI-300 Index Fund

ChinaAMC CSI-300 Index ETF (Stock Code: is the first RMB-denominated and RQFII-Based ETF that directly invests in physical (non-synthetic) A-shares in the world. This new RQFII ETF (Exchange Traded Funds) is launched by China Asset Management Co. (AMC) Ltd., approved by Hong Kong Securities and Futures Commission (SFC) on June 29, 2012, and then listed on the main board of Hong Kong Stock Exchange (HKEx Stock Code: on July 17, 2012. It is traded in Renminbi (called RMB, Yuan or CNY) with trading lot size of 200 shares (each lot). Citibank is the fund custodian, while China Asset Management (H.K.) Ltd. (CAMHK) is the fund issuer (and also fund manager).

Now let us publish our fund analysis report as below:

Fund Analysis of the First RMB A-share Physical (Non-synthetic) ETF in HK

(1) Underlying asset for this A-share fund is supposed to primarily correspond to performance of the benchmark CSI-300 index by applying a full replication strategy. CSI-300 index is a category-weighted and free-float adjusted index published by China Securities Index (CSI) Ltd. CSI-300 index covers the top 300 (with biggest total market capitalization) liquid A-shares traded publicly on SZSE (Shenzhen Stock Exchange) as well as SSE (Shanghai Stock Exchange) in PRC (People's Republic of China).

Below lists down the sector breakdown of CSI-300 index:

Sectors in CSI-300 IndexPercentage (%)
Consumer Discretionary8.3%
Consumer Staples7.9%
Health Care4.3%
Information Technology2.4%
Telecommunication Services0.9%

Table: CSI-300 Index Sector Breakdown

Below lists down the top 10 constituents of CSI-300 index:

(Ranking) Name of ConstituentWeighting (in %)
(1) China Merchants Bank Co. Ltd. (CMB)2.84%
(2) China MinSheng Banking Corp. Ltd. (CMSB)2.83%
(3) Ping An Insurance Group Co. of China Ltd. (PAIG)2.76%
(4) Bank of Communications Co. Ltd. (BoComm)2.08%
(5) Industrial Bank Co. Ltd. (INDB)1.98%
(6) Shanghai PuDong Development Bank Co. Ltd. (SPDDB)1.93%
(7) KweiChow MouTai Co. Ltd. (KCMT)1.93%
(8) Citic Securities Co. Ltd. (CITIC)1.87%
(9) China Vanke Co. Ltd. (VANKE)1.76%
(10) China ShenHua Energy Co. Ltd. (CSHE)1.69%

Table: Top 10 CSI-300 Index Constituents

China CSI 300 index graph

Current China CSI-300 Index Trend (Compare with Shanghai Composite Index and Shenzhen Composite Index Respectively)

Source: Product Key Factsheet and IPO Prospectus of ChinaAMC CSI-300 Index ETF (Stock Code:

The fund manager, however, may also apply a representative sampling strategy if some constituents of the index are of restricted or limited availability. For better cash management purpose, the fund can invest less than 5% of its NAV (net asset value) in cash deposits or money market funds.

(2) It is a sub-fund under the ChinaAMC ETF Series. Below lists down its structure of ongoing fees:

Fee(s) Payable by the Sub-FundAnnual Fee Rate (in % NAV)
Management FeeUp to 1% p.a. of NAV (calculated on each dealing day). Current Fee Structure: 0.7% p.a. of NAV
Administration and Performance FeesIncluded in the Management Fee Already
Trustee fees (for payments to Administrator, Custodian, and PRC Custodian)Up to 1% p.a. of NAV (calculated on each dealing day) with a minimum fixed fee of USD$4K each month. Current Fee Structure:
0.1% (if NAV not exceeding USD$200 million);
0.09% (if NAV not exceeding USD$600 million but exceeding USD$200 million);
0.07% (if NAV exceeding USD$600 million).
Registrar FeeA fixed ongoing registry service fee of HKD$96K for each year.
Service Agent FeeA fixed ongoing reconciliation fee of HKD$5K for each month.
Total Expense Ratio (TER)0.99% p.a. of NAV (value expected by the Sub-Fund Management)

Table: Ongoing Fee Structure of ChinaAMC A-share ETF

(3) Unlike the other existing synthetic A-share ETFs in the market, this ChinaAMC ETF does invest in or directly hold A-Shares in PRC.

Below lists down the major differences between physical (non-synthetic) RQFII A-share ETFs and current synthetic A-share ETFs:

Physical (Non-Synthetic) RQFII A-share ETFsCurrent Synthetic A-share ETFs
Underlying AssetsInvest directly in PRC A-share Stock Markets, i.e.: Have direct holding of PRC securitiesInvest indirectly in PRC A-share Stock Markets via Financial Derivative Instruments (FDI) having PRC A-share exposures, i.e.: No direct holding of PRC securities.
Replication MethodPhysical (non-synthetic) full replication (or representative sampling) for the composition of underlying indexSynthetic replication of underlying index
RQFII or QFII Investment Quota ProviderRQFII investment quota directly from ETF ManagerQFII investment quota indirectly from various third parties
Trading or Settlement CurrencyRMB (Renminbi, Yuan, CNY)HKD (Hong Kong Dollars) or USD (U.S. Dollars)
Derivatives Counter-Party RiskNoYes
Costs of DerivativesNoYes
Collateral RequirementsNoYes

Table: Key Differences between Physical A-share ETFs and Current Synthetic A-share ETFs

(4) Annual Dividend Policy: This A-share fund may distribute or pay dividends (if any) to unitholders at least annually.

(5) The same as the existing index-tracking ETFs, this A-share fund is subject also to passive investment risks (since it is a passively-managed index-tracking fund) or tracking error risks (since it is not hedged for currency and foreign exchange rate risks). It may suffers from concentration risk (since it invests purely in PRC A-share assets), regulatory or political risks in emerging markets. There are, however, other unique risks for this fund you need to be aware of:

(5a) New product and new manager risks: As it is the first physical A-share ETF in the market, untested nature and novelty of this product make it possibly riskier than existing ETFs. In addition, although ChinaAMC (China Asset Management Co. Ltd.), is the biggest passive fund management company in PRC, its subsidiary CAMHK (China Asset Management H.K. Ltd., i.e.: the fund manager of this new ETF) has no prior experience in managing any ETF.

(5b) ChinaAMC CSI-300 Index ETF is traded with RQFII (Renminbi Qualified Foreign Institutional Investor) quota granted to ChinaAMC. RQFII, by definition, is the Renminbi-version of existing QFII policy but requires no currency conversion in PRC. RQFII is a relatively new regime through implementation of CEPA for promoting RMB internationalization in offshore markets.

Since the fund manager is granted an initial RQFII investment quota of RMB 5 billion by SAFE (State Administration of Foreign Exchange) to directly invest in PRC domestic stock markets, this fund can thus be subject to risks concerning possibly insufficient RQFII quota or any potential change of future RQFII policy. In worst case, RQFII quota can be used up, the fund manager may then have to suspend creation of new units, and thus its stock price can have a significantly high premium to the NAV (Net Asset Value) of each fund unit.

(5c) RMB currency and liquidity risk: Now Renminbi is still not freely convertible and is currently subject to exchange rate restrictions and controls. In fact, RMB deposits in H.K. has reached RMB 554 billion (as of end-March 2012) which can be used as liquidity pool for this ETF, but a large portion of deposits is to be used for trade settlement instead of capital account investment. Although Hong Kong Stock Exchange (SEHK) has launched a RMB Equity TSF (Trading Support Facility) that allows investors with insufficient RMB to buy RMB-denominated securities, this TSF currently supports only secondary trading of RMB shares and does not support ETFs. As a result, investors still cannot make use of TSF to pump liquidity to this A-share ETF.

(5d) Trading differences risk: Hong Kong stock market and PRC stock markets have difference trading hours as well as trading days (different holidays etc). In addition, A-Shares traded in PRC are still subject to trading band limits that restrict maximum gain or loss in stock prices. However, such trading band limits do not apply to this ChinaAMC A-share ETF because it is listed in Hong Kong. These trading differences may possibly enlarge the premium or discount level of the fund unit price to its NAV (Net Asset Value).

(5e) PRC brokerage risk: Under the current PRC policy, only one brokerage may be appointed for each stock market (i.e.: Shanghai Stock Exchange and Shenzhen Stock Exchange) to execute A-share trading transactions on behalf of this RQFII ETF. Since the fund manager relies heavily on one brokerage, if designated brokerage fails, it may impair the whole fund operation, may enlarge the premium or discount level of the fund unit price to its NAV (Net Asset Value), and the fund may no longer be able to track CSI-300, the underlying index, correctly.

(5f) This fund is subject to taxation regime risk. Although PRC tax authorities still have not enforced CGT (capital gains tax) on RQFIIs, ChinaAMC already makes a provision worth 10% of fund assets to deal with any possible tax liability on capital gains. Because PRC tax authorities may or may not collect any CGT (capital gains tax), such tax provisions collected may be excessive and may just lower the net asset value (NAV) of this fund.

(5g) Fund termination risk: This fund can possibly be terminated early, say if CSI-300 shall no longer be used as benchmarking index or if the size of this sub-fund becomes less than RMB150 million.

Conclusion of Our Fund Analysis:

ChinaAMC CSI-300 Index ETF (Stock Code: closed at 24.2 for its first listing day on July 17, 2012. NAV (Net Asset Value) was about RMB 380 million, and NAV per unit was RMB 24.14 as the benchmark CSI-300 index closed at 2414 on the same day. As a result, the ETF was traded at a premium stock price (+0.25%) to the NAV per unit.

Considering all the above risk factors, and the short-term performance prediction of PRC equity markets (Source: our 2012 Shanghai SSE Index target is 2358) as well as the same formula we used to calculate our A50 China ETF target value (Source: our A50 target is HKD$10.5), our CSI-300 Index target should now be 2451 (subject to change) and our target Net Asset Value (NAV) per each ChinaAMC A-share fund unit should now be RMB 24.51 (1/100 of index level). Since RQFII quota to PRC market is not unlimited, it is more likely that the ETF can trade at a premium price (instead of a discount price) to the Net Asset Value (NAV) per unit in the longer-run because of the basic demand-and-supply principle. As the current calculated premium is +0.25%, our stock price target (fair value) of this ChinaAMC A-share ETF should now be RMB 24.51 x (1 + 0.25%) = RMB 24.57. Based on this fair value at RMB 24.57 level, the existing ETF stock price of RMB 23.55 (as of July 31, 2012) shall be rated 'reasonable'. Therefore we will recommend a sell if its stock price reaches RMB 25.82 (expensive rating), or will recommend a buy if it reaches RMB 23.32 (cheap rating). Rating Reference: Mr China's Rating System.

It is clear from the above analysis that this new physical A-share ETF (Stock Code: will compete directly with the current most popular Synthetic A50 China ETF (Stock Code: which is a HKD-denominated and an opened-end fund. Other synthetic HKD-denominated iShare CSI-300 A-share Index ETF (Stock Code: from BlackRock, DBX CSI-300 Index ETF (Stock Code: from Deutsche Bank, as well as WISE (World Index Shares ETF) CSI-300 Index China Tracker (Stock Code: from Bank of China International (BOCI) and Prudential Insurance are also key direct competitors to this new fund. After all, they are all suitable for long-term foreign investors who bullish about the emerging PRC equity markets.

For this ChinaAMC CSI-300 Index ETF (Stock Code:, it can be regarded as a good entry point to PRC equity markets because A-shares trading are still restricted only to PRC domestic residents, QFIIs (Qualified Foreign Institutional Investors) or the new RQFIIs (RMB Qualified Foreign Institutional Investors) quota owners.

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