On Saturday, the China Securities Regulatory Commission, the
People's Bank of China and the State Administration of Foreign
Exchange agreed to increase the quota for the Renminibi Qualified
Foreign Institutional Investor program to $32 billion from just
over $11 billion. The move could stoke investment in Chinese
equities using yuan raised outside of the country.
While companies can freely convert yuan raised in trade
transactions, the government must approve stock and bond
transactions involving repatriated Chinese currency,
News of China's increased RQFII could provide a jolt to the
Market Vectors China ETF (NYSE:
), which is the only U.S.-listed ETF to provide access to China's
A shares market. Since foreign investors are limited in owning
Chinese A shares directly, PEK uses swaps and derivatives
instruments to accomplish its objectives.
Earlier this year,
Chinese regulators boosted the quotas for
qualified foreign institutional investors to $80 billion from $30
At the time of that April announcement, PEK saw a modest
bounce because news of more liberal foreign institutional
investors requirements in China was seen as helping lower the
premium at which PEK often trades to its net asset value. Due to
its use of swaps and derivatives, PEK enters swap agreements with
banks, leading to the ETF's NAV premium.
As of Friday, PEK traded at an eight percent premium to its
net asset value,
according to Market Vectors data
that trade at elevated premiums to NAV have previously been
viewed as vulnerable to short selling by professional
arbitrageurs looking to profit from the market price/NAV gap.
PEK's NAV premium did narrow following the April announcement of
increased foreign investor quotas.
China's securities regulator is studying the possibility of
boosting the $1 billion ceiling on individual funds in the QFII
program, Bloomberg reported.
PEK, which debuted in October 2010, currently holds index
swaps with a notional value of over $11.9 million. Credit Suisse
) is the counter-party for all of those swaps, according to
At the sector level, PEK is more diverse than many of its
larger China ETF counterparts. The devotes just 19.6 percent of
its weight to swaps of financial services names, a small amount
of exposure to that sector compared to other China ETFs.
Materials and capital goods names represent 12.5 percent and 11.5
percent of the fund's weight, respectively.
Investors that are interested in PEK might want to wait and
see if the most recent RQFII news forces the ETF's premium to NAV
down. That would result in better market pricing and a superior
buy point relative to current levels.
For more on China ETFs, click
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