More than 1,400 companies — more than half of all listings — are on trading halts in China, in an effort to shield themselves from the dramatic equity market sell-off that has wiped trillions of dollars off the value of Chinese stocks.
The suspensions have left a number of ETFs holding frozen shares or derivatives linked to them, even as the funds themselves continue to trade.
One Hong Kong-listed ETF that tracks China’s small-cap board, the ChiNext, traded every day last week, despite more than two-thirds of the underlying shares it reflects being suspended. On Friday, the CSOP ChiNext ETF jumped by a fifth, while the index itself rose only 4.1 per cent.
Concerns have been growing globally over the potential mismatch between the liquidity of the underlying collateral that ETFs hold and that of their units.
The Bank of International Settlements warned last month that the growth of passive funds may have created a “liquidity illusion” in bonds, although analysts say the problems currently facing Chinese equity ETFs are specific to the idiosyncrasies of that market.
Chinese shares have tumbled in the past month, as millions of retail investors unwind leveraged bets on the market. Beijing has responded with various supportive measures, including bans on short selling, and on stock sales by large shareholders. The central bank has also been funnelling money to brokerages to help them buy equities.
Trading volumes for many China-tracker ETFs have doubled over the past two weeks, as market volatility has risen. ETFs have experienced wild daily price swings as investors use passive funds for price discovery of suspended Chinese assets.
Last Thursday, the Deutsche X-Trackers Harvest CSI 300 ETF, which trades in New York, rose 20 per cent.
The extent of share suspensions has made ETFs “one of the only tradable instruments” for global investors looking to manage their exposure to Chinese stocks, said Warren Deats, head of Asia-Pacific portfolio trading at Barclays. Such funds are performing like futures contracts, he added, with investors using them to estimate the true level of the market — a view echoed by fund providers.
“ETFs may be priced by market makers and investors making assumptions on the price at which these suspended stocks may trade,” said Marco Montanari, head of passive asset management at Deutsche Asset & Wealth Management in Asia. “This contributes to price discovery and can be another reason [for] premium and discount.”
Some funds have been trading well below the value of the underlying assets, prompting speculation that Chinese investors have been dumping ETFs to generate cash.
At one point last week, BlackRock’s iShares FTSE A50 ETF — often referred to by its Hong Kong stock exchange ticker “2823” — was trading at a 15 per cent discount to its net asset value. The price of units in the $6bn fund dropped 12 per cent last Wednesday, before bouncing back 12.6 per cent the following day.
Deutsche Asset & Wealth Management, CSOP Asset Management and BlackRock said that all their China-tracker funds are still accepting creations and redemptions, despite the suspensions.
“The market volatility will impact all investments in China, but China ETFs are doing what they are designed to do,” said Mr Montanari.
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