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Chinese equity investors take cover in ETFs following equity rout
Chinese investors buying mainland shares are increasingly looking to hedge their bets amid volatile markets. While short-selling in the mainland is heavily regulated, investors are finding exchange-traded funds an increasingly viable option to protect their investments.
Christina Wang 30 Jul 2015
Chinese investors buying mainland shares are increasingly looking to hedge their bets amid volatile markets. While short-selling in the mainland is heavily regulated, investors are finding exchange-traded funds (ETFs) an increasingly viable option to protect their investments.
 
The Shanghai Composite index shed 2.2% on Thursday following Wednesday's 3.5% gain.
 
In a report, research firm Markit says offshore-based investors have harnessed ETFs as an efficient vehicle to gain exposure to falling Chinese equities, while local Chinese investors have flocked to money market ETFs.
 
Offshore investors are able to short sell US$1.2 billion in ETFs tracking Chinese market.  Record inflows were also recorded in money market ETFs from local Chinese investors.
 
In total, over US$100 billion in ETFs track Chinese markets, with 57% listed on the mainland in Shanghai and Shenzen exchanges.
 
Among the ETFs, the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS) is the most short-sold ETF exposed to the region, with 53% of shares outstanding on loan or US$17 million of value on loan.

Currently, more than 90% of available stock of the ETF is short sold. The ASHS tracks 500 small cap companies listed on the Shanghai and Shenzhen stock exchanges.
 
“ETFs are frequently short-sold in the US, in Hong Kong or other jurisdictions and this has no impact on the management activity of the manager,” Marco Montanari, head of passive asset management APAC, Deutsche Asset & Wealth Management, tells The Asset.
 
Also, “we don't see how the onshore A-shares market could be affected,” Montanari says. Chinese market regulators have blamed short-sellers to explain the recent rout in domestic market.
 
Markit says ETF short-selling’s impact on the massive markets of China is limited given that the aggregate position in the product represents less than 1.2% of total ETF asset under management.
 
“In order to short-sell an ETF, a specific market participant has to borrow the ETF first. And in order for an ETF to be borrowed it has to be created and exist in the first place. Short-selling an ETF does not have the same impact on a specific market as a direct short-selling of a stock which is part of that market,” Montanari explains.

 

Onshore China, domestic investors find refuge in the largest (by AUM) ETF in China, Fortune SG Money Market ETF, with US$16 billion currently and record inflows totalling 57.6 billion yuan (US$9.2 billion) in July alone. 

 

 

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