The fund managers running the X- trackers Harvest CSI 300 China A-Shares ETF at Deutsche Asset & Wealth Management are facing a problem their rivals would love to have. They’re luring too much money.
In the span of five days last month, the U.S.-based exchange-traded fund pulled in $130 million, sending assets surging by 33 percent to $515 million and nearly exhausting its Chinese government-imposed A-share purchasing quota.
Managers were forced to get creative. They limited new creations and borrowed quota from another fund to avoid closing the year-old ETF to inflows and keep a potentially disruptive premium to underlying assets from developing.
Their dilemma highlights what’s likely to become an increasingly common predicament as fund providers from BlackRock Inc. to CSOP Asset Management Ltd. look to follow suit and open up China’s more than $4 trillion A-shares market to U.S. ETF investors.
How should they handle growing demand for exposure to mainland companies from Industrial Bank Co. to Gree Electric Appliances Inc. even as Beijing continues to ration out the quota foreign ETF providers need?
“The A-shares market has gotten a lot of attention,” Dodd Kittsley, the New York-based global head of ETF national accounts and strategy at Deutsche Bank AG’s Deutsche Asset & Wealth Management unit, said in an Oct. 8 telephone interview. “We’ve been proactive in trying to create capacity without quota.”
Surging demand has been fueled in part by the biggest quarterly gain for mainland stocks since 2009. The Shanghai Composite gauge rallied 15 percent in the three months through Sept. 30, even as the MSCI Emerging Markets Index fell 4.3 percent.
To deal with the influx of new money, Frankfurt-based Deutsche Asset & Wealth Management said on Sept. 11 that the ETF would accept just one creation unit per day. A unit represents 50,000 shares or about $1.3 million at current valuation. The fund provider is increasing the cap to 10 creation units per day, according to a statement today.
“We wanted to maintain a valve of liquidity, increasing the fund size but doing so in a measured way, in anticipation of getting a higher quota,” Kittsley said.
A Qualified Foreign Institutional Investor license, known as a QFII, or Renminbi Qualified Foreign Institutional Investor license, known as an RQFII, is needed for foreign asset managers to buy A-shares. Once the license is obtained, the investor also needs to submit an application to China’s State Administration of Foreign Exchange for a specific dollar amount of investment quota that they can use to buy mainland stocks.