Following the launch of the new all-China exchange-traded fund (ETF), the first product of the partnership between ICBC Credit Suisse Asset Management (ICBCCS) and WisdomTree, aimed at responding to growing investor demand for exposure to China's mainland equity markets, SRP spoke with Laura Lui (pictured), head of index and quantitative investment at ICBCCS about the significant restrictions to capital flows in and out of China, and how the new ICBCCS WisdomTree S&P China 500 Ucits ETF can help to address those concerns.
"Clients have indeed been asking questions about the capital flow restrictions, but we have set up multiple channels for inbound and outbound remittances to limit any risks," said Lui, adding that the fund has both a main RQFII allocation and a separate replacement RQFII lot, as well as access to the Shanghai-Hong Kong stock connect scheme.
According to Lui, there has been 'significant' interest in the new ETF so far, and indications are investors are interested in expanding their exposure to A shares, particularly in light of the upcoming launch of the stock connect between the Hong Kong and Shenzhen exchanges.
The Shenzhen-Hong Kong connect will be set up in the framework of the Shanghai-Hong Kong scheme and will allow Hong Kong investors to tap some 880 Shenzhen-listed stocks. This adds to 567 Shanghai-listed stocks already available via the Shanghai-Hong Kong connect.
"Clients are keen to find out which are the best products for them to utilize in positioning themselves for the upcoming SZ-HK connect," Lui said.
In contrast, one senior Hong Kong-based investment banker pointed that he doesn't expect a surge in demand as "a lot of people are quite wary of A shares, because they have been losing money quite often from mainland markets".
"People don't have very good experience dealing with A shares," said the banker. "For example, last year during Q2, when A shares were soaring, we didn't see excessive interest in mainland-related securities for that reason. And, of course, when the markets slumped most investors retreated."
Lui, however, pointed that the SZ-HK stock connect will support the chances of A shares being included in the MSCI Emerging Markets benchmark, which is followed by an estimated US$1.5tn. MSCI has set up a work group with the China regulator to iron out a number of outstanding issues, like corporate action and foreign access to the mainland markets, said Lui.
"[In either case] the inclusion of A shares will be in multiple stages and in small increments, with the mainland initially accounting for a disproportionately small weight on the index," Lui said, adding that a suitable structure would replicate how China American Depository Receipts (ADRs) were incorporated in the MSCI EM. "Inclusion will play more of a psychological role - it will encourage investors to pay more attention to and learn how to assess the market. It's more on the sentimental side."
According to Lui, China is an unavoidable factor in the global investment market, and ICBCCS is seeking to position itself as "a leading provider of China investment solutions".
"The ETF and index businesses are the core of our international business operations, and we will continue to develop those both by ourselves and in collaboration with overseas partners, such as WisdomTree," Lui said.
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