On 29 June 2012, the China Securities Regulatory Commission
(CSRC) approved two cross-border exchange-traded
funds (ETFs) - China AMC's Hang Seng Index ETF
and E-Fund's Hang Seng China Enterprise ETF - and their
respective unlisted feeder funds. The issuers are PRC fund
management companies with qualified domestic institutional investor
(QDII) licences. China AMC's ETF is listed on
the Shenzhen Stock Exchange whilst the E-Fund ETF is listed in
Shanghai. They both track Heng Seng Indices with Hong Kong listed
stocks as constituents, and channel China domestic investors'
money to the Hong Kong stock market.
The PRC regulators have not so far issued rules specifically
covering cross-border ETFs, so they are subject to regulations
generally applicable to "authorised funds" and "QDII
funds", meaning funds that are mandated to invest into
There are some investment restrictions applicable to QDII funds:
(i) QDII funds should primarily invest into stock markets whose
regulators have signed an MOU with the CSRC, (ii) investments into
non-MOU countries collectively should not exceed 10% of a QDII
fund's AUM, (iii) a QDII fund's investments into a single
non-MOU country should not exceed 3% of AUM. These rules limit the
indices which a cross border ETF may track.
From news reports, cross-border ETFs that are in the pipeline
include ETFs tracking the S&P 500 Index, the Dow Jones
Industrial Index and the FTSE 100 Index. As Hong Kong, the United
States and the United Kingdom have signed the relevant MOU with the
CSRC, cross-border ETFs may track these indices. For ETFs seeking
to track global equity indices, there might be practical
difficulties in complying with the above investment restrictions,
depending on the constituent stocks. As of early 2012, CSRC has
signed over 50 MOUs: (
QDII rules also include provisions on the use of financial
derivatives by QDII funds: derivatives should be used for the
purpose of hedging risks and effective management and not for the
purpose of speculation or expanded trading; and exposure to
financial derivatives by a QDII fund should not exceed 100% of its
NAV. However it is not entirely clear whether it is possible for
cross-border ETFs to use synthetic replication. Both approved ETFs
use physical replication.
These products present new investment opportunities for the PRC
domestic market and new business opportunities for foreign parties,
such as index providers, investment advisors, overseas custodians
and overseas brokers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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