International index funds search to shift out of Chinese language ADRs as delisting looms By Reuters

By Samuel Shen and Selena Li

SHANGHAI/HONG KONG (Reuters) – International index-tracking fund managers with publicity to U.S.-listed Chinese language companies are pushing index suppliers to swap into their Hong Kong-traded friends as delisting dangers threaten to roil the $37 billion marketplace for China-focused exchange-traded funds (ETFs).

Washington is demanding full entry to the audit papers of those companies, a request to date denied by Beijing. And not using a resolution, Chinese language American Depositary Receipts (ADRs) will probably be delisted by 2024, doubtlessly bashing ETFs with large ADR publicity.

“We’ve got proactively engaged all of our index suppliers on the dangers related to ADR delisting,” mentioned Brendan Ahern, CIO of Krane Funds Advisors, which manages China-focused ETFs primarily based on CSI and MSCI indices.

“Passive ETF managers will need their index suppliers to transition from ADRs to the HK share courses with the intention to keep away from monitoring error,” he mentioned, referring to the unwelcome efficiency distinction between an ETF and the index it tracks.

“Index suppliers are transferring at various speeds,” he added.

ETF managers together with CSOP Asset Administration and Samsung (KS:) Asset Administration mentioned they’ve additionally nudged their index suppliers to swap Chinese language ADRs into Hong Kong-traded friends, the place out there.

Some smaller index corporations, similar to China Securities Index Co, mentioned they’ve began the switching however the likes of S&P Dow Jones Indices and MSCI are extra cautious, citing the necessity for additional readability round Sino-U.S. audit talks, and issues over comparatively low liquidity ranges in Hong Kong.

Additionally, many lively fund managers, unfettered by index-tracking wants, have already dumped ADRs, or made the transition to Hong Kong shares.

TRACKING ERRORS

ADR publicity of the S&P New China Sector Index ETF, run by CSOP, has decreased to six% from over 30% a 12 months in the past after discussions between the Hong Kong-based asset supervisor and its index supplier, portfolio supervisor Wang Yi mentioned.

Final month, Chinese language index writer China Securities Index began prioritising inclusion of Hong Kong-listed shares for its CSI Abroad China Web Index, when an organization has a number of listings eligible for choice.

The index is tracked by a $6 billion ETF run by KraneShares and plenty of different index funds.

Others are additionally holding out.

Earlier this month, China proposed guidelines that may doubtlessly give U.S. regulators entry to Chinese language corporations’ audit working papers, as Beijing seeks to succeed in a deal to maintain Chinese language ADRs listed.

Mike Shiao, Invesco’s chief funding officer, Asia ex-Japan, mentioned the overhang on U.S.-listed Chinese language corporations was “partially” eliminated, however Invesco, which runs an ETF closely invested in ADRs, would proceed to watch the U.S. response.

S&P Dow Jones declined touch upon potential modifications to methodologies, whereas MSCI and Russell additionally declined remark.

Underscoring some traders’ impatience, the KraneShares CSI China Web ETF mentioned final month that it aimed to totally transition to Hong Kong shares in coming months.

“May an ETF convert with out the index supplier? Sure, although it might create monitoring error,” KraneShares’ Ahern mentioned. “Clearly one would fairly have monitoring error versus holding a inventory by means of a delisting,” he mentioned.