China's Increased RQFII Quota Could Lift This ETF
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, Bloomberg reported.
News of China's increased RQFII could provide a jolt to the Market Vectors China ETF (NYSE: PEK), 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.
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. ETFs 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 (NYSE: CS) is the counter-party for all of those swaps, according to Market Vectors.
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.
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