BNY Mellon inks deal to tap China's ETF potential

The Bank of New York Mellon has inked a deal that it hopes will make overseas-listed Chinese stocks readily available to mainland investors. 

It has signed a memorandum of understanding with the Shanghai Stock Exchange to clear the way for potential listings there of exchange-traded funds (ETFs) based on the bank’s indices of companies that are floated via depositary receipts (DRs). These products will have to be approved via the usual QDII process.

BNY Mellon has 140 such indices tracking the shares of companies based in one country but listed in another through a DR. 

In all there are 74 China-based firms whose shares are publicly tradable solely through a DR, the majority via a single listing on the New York Stock Exchange or Nasdaq. These include the likes of Baidu, NetEase, Home Inns and Ctrip. 

The MoU means that assets managers in China could now look to create ETFs based on BNY Mellon’s indices and list them in Shanghai. This would make products tracking the shares of those leading Chinese firms widely available to investors within China in a locally listed products denominated in renminbi. 

“We believe there would be some interest in offering such products in the Chinese market,” says Gregory Roath, head of BNY Mellon’s depositary receipts business for Asia-Pacific. 

He highlights the appeal of companies listed via a DR: “They are recognised as being proactive in terms of investment relations activities and are committed to the market internationally. There’s value in creating an index based on a grouping of those types of companies.” 

The bank’s research points to demand from both institutional and retail investors for such products. It’s in preliminary talks with Chinese asset managers, but says it’s too early to say how many DR products the domestic market might bear. 

For now only Qualified Domestic International Investors (QDIIs) are allowed to create ETFs in China. International firms would need to create a joint-venture with a QDII asset manager to tap the domestic ETF market, which hasn’t proved attractive to ETF providers so far. 

But Marco Montanari, director of ETFs and structured funds in Asia for Deutsche Bank, notes: “Everybody is observing the Chinese market because it has huge [ETF] potential.” 

There are already ETFs listed in Toronto and New York focusing on Chinese DRs. There could also be demand for products in China that look at DRs in other markets such as India or Latin America, or specific industries or sectors, Roath suggests. 

It’s obvious why the New York bank would want to target China. It’s Asia’s largest market in terms of ETF activity (even though it only has 13 listings), with $309 million in daily turnover, or 36% of the region’s total, according to Deutsche Bank. Its $8.8 billion in ETF assets ranks China third behind Japan and Hong Kong. 

Four of the six most-active ETFs in Asia are listed in China, led by the China 50 ETF from China Asset Management, according to Deutsche. With $102 million in average daily volume, it’s the second most popular listing in the region in terms of trading, behind only the $137 million in daily volume for the iShares FTSE/Xinhua A50 China Index ETF listed in Hong Kong. 

The E Fund SI100 Index Fund from E Fund Management ($98 million), the Shanghai SSE 180 Index Fund from Huaan Fund Management ($51 million) and the China SME ETF from China Asset Management ($35 million) also rank in the top tier of Asian ETFs in terms of daily trading. 

Separately, BlackRock Asset Management announced changes to the way it runs the iShares FTSE/Xinhua A50 China Index ETF. It will ensure that the product has a maximum of 10% of its assets exposed to any one counterparty, down from 15%. It follows a row that broke out in Hong Kong over the use of synthetic ETFs.

This will bring the A50 into line with all new ETFs launched in Hong Kong. It had initially been granted permission to have higher levels of risk with its counterparties as there weren’t enough companies for it to trade with when it launched. 

As the most-popular Asian ETF in terms of volume, with daily turnover of $137 million, the ETF provides access to the China A-share market through China A-Share Access Products (Caap) – synthetics based on underlying A shares and issued by investment banks with quotas to invest in China’s domestic markets. 

The ETF currently deals with 12 Caap issuers, and BlackRock says the change in exposure levels will affect three of them.