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US bar on China stocks seen unlikely to hurt Hong Kong’s Tracker Fund

Tracker Fund
By Hui Ching-hoo   
January 13, 2021

Hong Kong Tracker Fund, one of the largest exchange-traded funds in the city, will stop investing in some Chinese stocks to comply with a US government order, but market participants say this is unlikely to have an immediate impact on money flowing into the fund.

US President Donald Trump issued an executive order on November 12 prohibiting US investment in 31 Chinese companies deemed to be affiliated with the Chinese military.

Three companies on the blacklist – China Mobile, China Unicom, and China National Offshore Oil Corporation – are constituents of Hong Kong’s Hang Seng Index.

The Tracker Fund, which is benchmarked against the index, is managed by State Street Global Advisors Asia.

The company says it will comply with the US order and won’t make any new investments in the blacklisted stocks. But it will keep its existing investments.

A fund that cannot invest in the prohibited stocks won’t be able to fully mirror the performance of the underlying benchmark.

But China Mobile, China Unicom, and China National Offshore Oil Corporation only have a combined 4.27% weighting in the Hang Seng Index, says Jackie Choy, director of Asia ETF at US investment consultancy Morningstar.

“With their minimal representation, it is unlikely to heavily affect fund flows into the Tracker Fund, particularly with its massive fund size at about HK$103 billion (US$13.2 billion),” Choy tells Asia Asset Management (AAM).

But if index provider Hang Seng Indexes Company increases the weighting of the three companies in the benchmark, State Street won’t be able to buy the stocks to mimic the readjustment.

“As an index fund, the Tracker Fund is designed to provide investment results that closely correspond to the performance of the HSI…the manager seeks to achieve the investment objective by investing all, or substantially all, of the fund’s assets in shares in the constituent companies of the HSI,” a spokesperson for State Street tells AAM.

New York-based BlackRock Inc. is also barring its ETFs from investing in the 31 stocks on the US blacklist.

In a statement on January 11, the world’s largest fund manager say its iShares ETFs “have adjusted and will continue to be responsive in accordance with their respective indexes’ treatment of securities impacted by recent US sanctions on certain Chinese companies”.

The move by the two US asset managers is unlikely to deter global investors from investing in China-focused ETFs, according to Terence Chong, associate professor of economics and executive director of Hong Kong-based Lau Chor Tak Institute of Global Economics and Finance.

He says investors have many other options. Furthermore, major index providers such as MSCI and FTSE Russell are already removing the companies on the US blacklist from their indices, so investors can more easily allocate to China ETFs, Chong tells AAM.