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New ETF offers UK investors direct access to Chinese stock markets

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UK investors can now have direct exposure to onshore-listed Chinese companies following the launch of a new exchange traded fund (ETF).

Source, one of Europe’s biggest ETF issuers, has listed a physically replicated Chinese A-Share ETF on the London Stock Exchange, the first of its kind to be traded in the UK or Europe.

The fund, launched in partnership with Hong Kong-based CSOP Asset Management, will allow investors to invest in China’s top 50 companies in Renminbi.

The move follows in the footsteps of Deutsche Bank, which is expected to list a similar product on 16 January.

Foreign investors have typically accessed Chinese markets through H-Shares, which are listed on the Hong Kong Stock Exchange, as restrictions on foreign share ownership have prevented products including ETFs from physically holding A-Shares.

Historically, there has been a big difference in price between A-shares and H-shares, with A-shares typically trading at a premium over H-shares, sometimes by as much as double, despite the shares being for the same company. This was largely due to imbalances between supply and demand of high quality stocks in China.

However, high restrictions and strict regulation, combined with high demand from newfound investible wealth has started to push up A-share premiums.

Currently, A-share valuations are around 25% lower than their long term average, which is likely to attract investors keen to access onshore listed Chinese companies, according to Adam Laird, passive investment manager at Hargreaves Lansdown.

He says: “A-Share ETFs have been popular in the US and give investors a new way to access Chinese companies. There is a lot of opportunity in China and funds of A-Shares contain many companies that investors cannot access through other products. Like all emerging markets however there are risks- these shares can be volatile and illiquid at times.”

Source’s product tracks the FTSE China A50 Index, covering the largest 50 stocks, whereas Deutsche Bank’s offering will track the broader CSI 300, replicating the performance of 300 stocks traded on the Shanghai and Shenzhen stock exchanges. The on-going charge is similar on both funds: 1.1% for the DB X-Tracker vs. 1.15% for Source.

Ratail investors can access both ETFs through a broker or an adviser.

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