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China ETF Demand Overwhelms Quota as Premium Surges

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The largest U.S. ETF that tracks mainland Chinese stocks has jumped to a record premium to its underlying assets as unprecedented demand forces fund manager Deutsche Bank AG to all but stop taking in new money.

The $633.5 million X-trackers Harvest CSI 300 China A-Shares ETF closed 5.1 percent above the value of its holdings on Nov. 24. The manager capped new creations at 50,000 shares, or one unit, for the second time in less than three months as it exhausted a government quota for buying onshore securities. Traders have poured $148 million into the exchange-traded fund in the past three weeks as the opening of the Hong Kong-Shanghai bourse link and China’s interest-rate cut sent stocks surging.

The premium is the highest among 1,451 U.S. ETFs tracked by Bloomberg. Investors bought the maximum allowable shares for a 7th day on Nov. 21 after the People’s Bank of China’s rate decision sent them surging more than 5 percent. Deutsche Asset & Wealth Management said earlier this month that because the fund was approaching its 3.36 billion yuan ($547 million) limit for purchasing mainland stocks, it would only accept one creation unit starting this week.

“Part of the premium on Friday was people buying it because of the news, which came out after the China close,” Stephen Tu, an analyst at Moody’s Investors Service in New York, said by phone on Nov. 24. “Extra flows looking to come into the fund are going to cause it to trade at a premium. There’s excess demand over the ability of the ETF to buy the underlying securities.”

‘Price Discovery’

The X-trackers Harvest CSI 300 China A-Shares ETF reached a record premium to underlying assets of 5.2 percent on Nov. 21, according to data compiled by Bloomberg. Surging demand has been fueled in part by a 25 percent rally in the CSI 300 index of mainland stocks over the past six months, even as the MSCI Emerging Markets Index fell 3.1 percent.

“The fund continues to trade efficiently with tight spreads and strong volume,” Dodd Kittsley, the New York-based head of ETF strategy at Deutsche Asset & Wealth Management, said in an e-mailed response to questions on Nov. 24. “As with any international equity ETF, premiums and discounts at the end of the U.S. trading day reflect a certain degree of price discovery.”

Shares in the ETF rose 1.6 percent to $29.67 yesterday. Total assets surged to $593.4 million, the most since its debut in November last year. The CSI 300 rose 1.4 percent to close at 2,723.02 today.

Exchange Link

Mariner Holdings LLC, which manages $33 billion, is considering selling its shares, given the widening premium, and plans to buy other A-share ETFs, according to its Chief Investment Strategist Bill Greiner.

“The fund is selling at a premium to its net asset value right now because there is a mismatch,” Greiner said by phone from Leawood, Kansas yesterday. “It is reaching a point where we are considering making a swap.”

While demand has surged for stocks in Shanghai after the exchange link started on Nov. 17, buying hasn’t been as robust in Hong Kong. Investors filled 39 percent of the limit for mainland shares and 6.1 percent for Hong Kong during the first week, data compiled by Bloomberg show.

BlackRock Inc.’s iShares China Large-Cap ETF, which tracks an index of Chinese companies that trade in Hong Kong and has no limits on accepting new money, trades at a 0.3 percent discount to its underlying assets, data compiled by Bloomberg show. Investors have pulled about $500 million from the fund this year, compared with inflows of approximately $315 million for Deutsche Bank’s ETF.

Other ETFs

China limits the amount of onshore securities licensed foreign asset managers can buy through quota systems to control the amount of investment in the country from overseas. At least four other U.S. exchange traded funds, including the Market Vectors ChinaAMC A-Share ETF and the KraneShares Bosera MSCI China A ETF, invest in mainland stocks, according to data compiled by Bloomberg.

“The Shanghai-Hong Kong link created higher demand, and the quota restricts the supply,” said Clem Miller, a Baltimore-based investment strategist at Wilmington Trust. “A quota increase will be the condition for the premiums” to narrow or disappear, he said.


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