A man looks at the Pudong financial district of Shanghai November 20, 2013.CARLOS BARRIA/Reuters
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 $646-million Deutsche X-trackers Harvest CSI 300 China A-Shares ETF closed 5.3 per cent above the value of its holdings yesterday. 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 $155-million into the exchange-traded fund this month 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 per cent. 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'
Surging demand has been fueled in part by a 26 per cent rally in the CSI 300 index of mainland stocks over the past six months, even as the MSCI Emerging Markets Index fell 2.8 per cent.
"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 2.1 per cent to $30.30 at 10:50 a.m. in New York. Total assets have surged to $603-million, the most since its debut in November last year. The CSI 300 rose 1.4 per cent 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."
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 per cent 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.
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.
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 per cent of the limit for mainland shares and 6.1 per cent for Hong Kong during the first week, data compiled by Bloomberg show.
"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.