New Deutsche ETF taps into China's onshore market

Reuters

By Ashley Lau

NEW YORK, Nov 5 (Reuters) - Foreign investors looking toaccess China's onshore market will have a new avenue starting onWednesday when Deutsche Asset & Wealth Management launches thefirst ETF targeting direct exposure to shares of companiesincorporated in mainland China.

The db X-trackers Harvest CSI 300 China A-Shares Fund, setto trade under the ticker "ASHR" on the NYSE Arca, will be thefirst ETF to directly tap into the "A-shares" market of domesticChinese stocks priced in yuan and traded on the giant stockmarkets in Shanghai and Shenzhen.

Other ETFs have provided exposure to the A-shares marketthrough derivatives, not shares. The Market Vectors China ETF, for example, invests in swaps linked to A-shares.

"The China A shares market is one of the few remaining majormarkets that is still somewhat untapped by most global investorsbecause access to them has been restricted," said DennisHudachek, a senior ETF analyst at IndexUniverse, referring toBeijing's tight restriction of foreign access to the shares.

Chinese regulators require foreigners to apply for status asqualified investors, or Renminbi Qualified Foreign InstitutionalInvestor (QFII or RQFII) status, and decide how much they caninvest by issuing quotas. Recently, regulators in Beijing haveexpanded the number of foreign investors allowed to buyA-shares.

"Transacting in China logistically is more complicated thanin the U.S.," Alex Depetris, chief operating officer of theDeutsche's exchange-traded products business in the Americas,said in an interview.

Deutsche has partnered with Harvest GlobalInvestments Limited, which is a RQFII, and a unit of HarvestFund Management Co Ltd, the second-largest asset managementcompany in China.

"That really enabled us to develop this product as soon asthe RQFII regime started being offered to ETF providers likeus," Depetris said.

ETF watchers will be looking to see if the fund's RQFIIquota level is able to accommodate investor demand, whichHudachek said will be the real test. Asset managers receivequotas for a certain amount of investment. Once that is used, amanager would have to apply for a new quota. That could pose aproblem for an ETF, which must buy more assets as investor moneycomes in.

Depetris said they plan to closely monitor quota levels toput in for an increased quota should investor demand necessitatea higher level.

If the new ETF is able to accommodate investor demand, thenthe fund "could be a total game changer," Hudachek said."There's a lot of money expected to flow into A-shares in thecoming years."

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