Research and ratings agency Moody’s has said groups that launch exchange-traded funds (ETFs) that provide access to Chinese stocks will gain a first-mover advantage.
The Chinese government controls international access to its stock markets through the renminbi qualified foreign institutional investor (RQFII) programme.
This allows fund companies to apply for a quota of stocks listed in Shanghai or Shenzen – known as A shares – that they can invest in and trade for their underlying funds.
Moody’s said some companies had used the RQFII programme to create the first China ETFs, and that such moves would bear fruit.
“Managers who are early movers in this rapidly growing space, such as Deutsche Asset Management, BlackRock, Invesco and KraneShares, will benefit both from the relaxation of cross-border channels as well as from investors’ growing preference for passive investment products,” the company said in a research note.
It said China’s closed capital markets had until now “greatly limited foreign ownership” of its securities, but that the “situation is rapidly changing”.
The company said passive access to Chinese A shares is “promising”, as the products provide retail investors with direct exposure, in contrast to some popular Chinese ETFs that are “mainly comprised of overseas and Hong Kong-listed Chinese companies”.
“Importantly, RQFII allows for physical exposure to A shares; previously, non-qualified foreign investors (and previous A-share ETFs) could only gain exposure through derivatives, which are costlier and introduce counterparty risk,” Moody’s said.
“China’s equity markets are still at the early stages of opening up to foreigners, meaning that global investors’ exposure to Chinese securities will continue to grow.
“This is positive for western asset managers who are early movers into these cross-border ETFs. Though the business is nascent for them, these firms are positioning themselves for long-term growth in the Chinese market.”
Moody’s said it expects quotas under the RQFII scheme to grow and “become an important cross-border conduit for the next several years”, adding that the Shanghai-Hong Kong Stock Connect scheme will allow foreign investors to directly trade companies listed on the Shanghai stock exchange.
“These programmes will increase global investors’ ability to invest in A shares. As global access increases, Chinese A shares are more likely to be included in broad global equity indices,” Moody’s said.
The ratings agency said the liberalisation is positive for unqualified foreign investors, who until now could only gain access to A shares through derivatives or by borrowing another company’s quota.
“This new avenue into Chinese A shares is credit-positive for the early movers into this product class, particularly those firms targeting investors located outside of Asia when raising assets for RQFII ETFs,” the agency said.
“For foreign investors, and particularly retail investors, these ETFs make accessible a once largely unattainable asset class in a liquid fund backed by physical assets.”
It added that Deutsche Asset Management, Harvest Global Investments, KraneShares and Source were among the early movers, while BlackRock has recently been granted RQFII status and Invesco has applied for RQFII status to trade Chinese local government debt.
“Typically, firms enter new markets following periods of strong market performance and broad investor interest, making costly investments and acquisitions,” Moody’s said.
“In the case of RQFII ETFs, entrants are entering the market following a period of depressed equity market performance, taking a long view of China’s growth.”
