Hong Kong-based asset manager E Fund Management has listed a new exchange-traded fund (ETF) in Shenzhen, based on the Hang Seng Composite SmallCap Index (HSSI).The fund is synthetic and aims to allocate at least 90% of assets, and at least 80% of non-cash assets, in derivative contracts on the HSSI. The rest is invested in the index's constituent stocks, according to an E Fund spokesperson
The underlying index aims to track the last 5% of the market capitalisation of the HSCI, and as of September 30 was composed of 179 constituent shares with a market cap of HK$1,043bn (US$134m). The fund's initial raising target is RMB 200 million (US$29.68m).
"Investing in Hong Kong stocks has become one of the primary options allowing the mainland investors to achieve their overseas asset allocation goals," the E Fund spokesperson said. "Besides, Hong Kong stocks have been undervalued, as compared with mainland shares - small-cap stocks, in particular."
Retail investment appetite in mainland China has surged in recent years, as household incomes surged alongside the unimpeded growth of the Chinese economy. In the first half of 2016 alone, a total of 97,636 wealth management products (WMPs) were issued in China, collecting funds of RMB 83.98 trillion (US$12.59tn), according to the China Central Depository & Clearing (CCDC)'s semi-annual report.
Strict capital restrictions, however, limit the options in terms of overseas exposure. One of the few tools for retail investors to gain access to foreign assets is via the Shanghai-Hong Kong stock connect, and, in about a month's time, the recently announced Shenzhen-Hong Kong stock connect.
"Southbound stock investment [through the SH-HK connect] has grown rapidly," said the E Fund spokesperson. "Between August 17 and the end of September, net inflows of southbound investment on HK stocks through SH-HK Stock Connect have achieved to RMB 80 billion (averagely RMB 3 billion each day, 6 times larger than it used to be)."
E Fund expects the upcoming SZ-HK Stock Connect will boost southbound flows, particularly for small cap stocks, as the new scheme lowers the market cap eligibility threshold for tradable stocks.
E Fund's ETF comes in the context of growing interest for inbound investment, as the hunt for yield funnels global buyers to the Asia Pacific region. Last month, Vanguard's flagship emerging markets ETF completed the switch to a new underlying index, which includes A shares. Earlier this year, ICBCCS and Wisdom Tree launched a new all-China ETF, with the goal of answering to client demand for exposure to the mainland.
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