Seizing the day
Category: Asia, China, Hong Kong
CSOP’s RQFII ETF soon to be traded around the clock worldwide
CSOP Asset Management Limited is taking advantage of the expansion of China's RQFII scheme to include overseas markets by launching another FTSE China A50 ETF, CSOP Source FTSE China A50 UCITS ETF, on the London Stock Exchange in January 9, 2014.
The Hong Kong-based ETF giant, which received five Asia Asset Management 2013 Best of the Best Awards - Hong Kong: Best China Fund House; Best RQFII Manager; Best RQFII Product; Best RQFII ETF; and CEO of the Year in Asia - aims to leverage its overseas experience to explore the as yet untapped European market.
The initiative comes after the Chinese government designated London as its European overseas RQFII hub in October 2013, coupled with granting 80 billion RMB (US$12.6 billion) worth of RQFII quotas.
While a number of RQFII participants having initiated their RQFII ETF overseas listing plans in the US, CSOP favours prioritising a European destination because of its understanding and experience in that market and with UCITS products.
Jack Wang, managing director and head of sales of CSOP Asset Management, tells Asia Asset Management that CSOP has an advantage over its rivals in Europe given it is one of the first Mainland asset managers to access the UCITS market. "The company has already rolled out two Luxembourg-domiciled sub-funds, whereas many of our peers have yet to develop a real foothold on the continent. The structure of RQFII products is very different from UCITS fund," he points out.
Mr. Wang continues: "Equally important, mainland asset managers should be aware of how to maintain their 'competitive edge' as the RQFII scheme becomes increasingly opened to foreign institutions. In this context, we've teamed up with Source, a European ETF specialist, to form a 50-50 joint venture trust entity in Dublin, thus ensuring we have firm control of the ETF's operation."
"CSOP has the strength in Mainland investment and Source has a strong distribution network in Europe. So this partnership enables us to advance market penetration more effectively. With the European market being institutionally dominated, our marketing focus will mainly be on institutions such as pensions and endowment funds."
CSOP closely scrutinised the tax treaty in the course of selecting the location for the fund's registration. "We decided to choose Dublin because of the taxation regime of Ireland-domiciled funds, which is consistent with the CEPA-compliant funds in Hong Kong," explains Mr. Wang. "Investors stand to benefit from the fund's tax-friendly structure. Also doing so neatly gets around the dilemma stemming from the discrepancy of the tax treaties extant between Hong Kong and European jurisdictions."
The rationale for pinpointing London as the first overseas listing destination was mainly due to the complex regulatory mechanism in Europe. "The company would need a longer time to communicate with the European regulatory watchdog," notes Mr. Wang, who also reveals that CSOP will kick off preparations for its planned US listing following the London IPO.
"By comparison, the American listing process is relatively straightforward because the procedure is highly standardised," he says, adding that he expects the US listing to be completed as early as the first half of 2014. Upon completion of both the listings, CSOP FTSE CHINA A50 ETF will be traded round the clock worldwide.
"We'll fine tune and tweak the ETF's structure when it goes public in the US," Mr. Wang declares. "Unlike the institutionally dominated European market, the US ETF industry is more broadly developed with high liquidity. The product's design, therefore, has been customised to dovetail with the trading pattern of US ETF investors."
Mr. Wang claims that many US investors are not sophisticated enough to distinguish the tracking capability of Mainland ETFs; for instance, the underlying index of the most popular US-listed Mainland ETF is not broadly representative in terms of mirroring Chinese market trend. Therefore, CSOP has to put more effort into investor education and delivering a product that can provide local clients with various features and functions.
"In the face of competition from resource rich US ETF sponsors, we're still analysing the market landscape, looking for an entry point to break in; for example, we are considering whether we should pair up with retail- or institutionally- focussed partners."
Although Beijing has identified Singapore and Taiwan as overseas RQFII hubs, Mr. Wang notes that the firm is reluctant to launch its RQFII ETF on these bourses with their close proximity to Hong Kong, because Asian investors can easily access the Mainland market via the RQFII platform available in the territory. Instead, CSOP intends to entice these Asian investors through its research capability in China's A-share market and expertise in providing the necessary advisory services to gain access to it.
As for Hong Kong, only a few RQFII ETFs have been able to gain critical mass since the first RQFII A-share ETF was launched in July 2012. Mr. Wang attributes the tepid market response thus far mainly to product homogeneity.
For more information, please contact:
Managing Director, Head of Sales
CSOP Asset Management
Tel: (852) 3406 5633