Frequently Asked Questions 
12/02/2015 
 
Chapter 6 Products - Securities Market

 

6.10

RQFII A-share ETFs


6.10.1    

What is RQFII?

RQFII stands for RMB Qualified Foreign Institutional Investor. RQFII is a policy initiative of the Mainland authorities which allow qualified holders of RQFII quota to raise funds in Hong Kong and channel such funds to directly invest into Mainland securities available in the Mainland securities market.

In December 2011, Mainland authorities approved the use of RQFII quota by qualified Mainland fund management companies and securities companies to setup RQFII funds to invest primarily in RMB bonds and bond funds issued in Mainland China (at least 80% of the fund’s assets).

In April 2012, Mainland authorities approved the use of the RQFII quota by qualified Mainland fund management companies and securities companies to issue RMB-denominated ETFs tracking A-share indices (RQFII A-share ETFs) for listing on the Exchange. 

 

6.10.2

What are RQFII A-share ETFs?

RQFII A-share ETFs are RMB-denominated physical A-share ETFs developed through the RQFII investment quota granted by Mainland authorities. RQFII ETFs seek to track the performance of an A-share index by investing RMB raised outside Mainland China directly in a portfolio of A-shares. RQFII ETFs may be traded in RMB or in dual counters (e.g. RMB and HKD).  Additional information on RQFII ETFs may be obtained from HKEX’s and SFC’s websites as well as the websites of individual RQFII managers.

 

6.10.3

Are there any special trading arrangements for RQFII A-share ETFs?

Special trading arrangements which also applies to other RMB-denominated ETFs in general, are highlighted below:

Stock Code

Type of ETFs

Stock code range

Non-RMB ETF

2800-2849

3000-3199

RMB ETF

82800-82849

83000-83199

Stock Short Name

 

Number of English characters

Number of Chinese characters

Non-RMB ETFs

15

8

RMB ETFs (Note)

13

6

Note: The last two characters for RQFII ETFs will be “-R” to denote the ETF is traded in RMB

 

6.10.4

In terms of product structure, what is the key difference between RQFII A-share ETFs and other A-share ETFs currently listed and traded on the Exchange?

The major difference in product structure between the two groups of ETFs lies in the index replication / tracking method:

  • With the RQFII quota granted to ETFs, RQFII A-share ETFs can achieve full replication or physical representative sampling by directly investing in the Mainland A-shares that replicate or represent the composition of the underlying A-share index. Thus RQFII A-share ETFs are physical ETFs.
  • Other A-share ETFs currently listed and traded on the Exchange are synthetic ETFs which track the index through synthetic replication by investing in derivative instruments to replicate the underlying index performance, without physically holding the underlying securities.

 

6.10.5

Will there be a different set of trading rules for RQFII A-share ETFs?

The Rules of the Exchange apply equally to the trading of RQFII A-share ETFs and other ETFs traded on the Exchange.

 

6.10.6

As RQFII A-share ETFs have RMB trading counters, in what currency will trading related fees and charges be collected by the Exchange from Exchange Participants?  

Same as current trading in USD and other RMB products, trading related fees and charges (such as transaction levy, trading fees, trading tariff, etc) will be collected by the Exchange from Exchange Participants in HKD regardless of the trading currency of the securities. 

 

6.10.7

What are the key risks which investors should be aware of before investing in RQFII A-share ETFs?

As RQFII A-share ETFs are listed ETFs, they are subject to the risks which are applicable to other listed ETFs. Please refer to Understanding Risks of ETFs page for details.

In addition, RQFII A-share ETFs are also subject to the following key risks unique to this class of ETFs. Investors are also advised to read individual ETF prospectuses including the product key facts statement (Product KFS) in full to fully understand the risks of the individual RQFII A-share ETF.

a.

Risks relating to the RQFII regime

RQFII A-share ETFs are physical, RMB denominated ETFs investing directly in A-shares. The novelty and untested nature of RQFII potentially makes RQFII A-share ETFs riskier than traditional ETFs investing in markets other than Mainland China.
RQFII A-share ETFs will utilize RQFII quota of the relevant RQFII quota holder. In the event that the quota is reached and the RQFII quota holder is unable to acquire additional RQFII quota, creations of new units of the RQFII A-share ETF may be suspended.  In such an event there may be significant differences between the trading price of a unit of the RQFII A-share ETF and the net asset value per unit.
The RQFII policy and rules are new and there may be uncertainty to its implementation and such policy and rules are subject to change and hence may adversely impact RQFII A-share ETFs.

 

b. RMB trading and settlement risk
Not all Exchange Participants or Clearing Participants may be ready and able to carry out trading and settlement of RQFII A-share ETF units traded in RMB on the Exchange.
The limited availability of RMB outside Mainland China may also affect the liquidity and trading price of the units.

Any disruption to the availability of RMB may adversely affect the capability of securities market makers in providing liquidity for the units of the RQFII A-share ETF traded in RMB.

 

c. Risks relating to Mainland and A-share market
Given that the A-share market is considered volatile and unstable (with the risk of suspension of a particular stock or government intervention), the creation and redemption of units of the RQFII A-share ETF may also be disrupted. A Participating Dealer is unlikely to redeem or create units of the RQFII A-share ETF if it considers that A-shares may not be available.
Investing in Mainland China-related companies and in the Mainland China markets involve certain risks and special considerations not typically associated with investment in more developed economies or markets, such as greater political, tax, economic, foreign exchange, liquidity, legal and regulatory risk.

 

d. Mainland tax risk
There are risks and uncertainties associated with the current Mainland China tax laws, regulations and practice in respect of capital gains realised by RQFIIs on its investments in Mainland China (which may have retrospective effect). RQFII A-share ETFs may have made a tax provision in respect of potential Mainland China tax liability. Such provision, however, may be excessive or inadequate to meet final Mainland China tax liabilities. Any shortfall between the provision and actual tax liabilities may be covered by the RQFII A-share ETF’s assets and may adversely affect the ETF’s net asset value (NAV). 

 

e. RMB currency risk
RMB is currently not freely convertible and is subject to exchange controls and restrictions. Since RQFII A-share ETFs are denominated in RMB, non-RMB based investors are therefore exposed to foreign exchange risk as a result of fluctuations in the RMB exchange rate against their base currencies.  The exchange rate of RMB may rise or fall.  If investors wish or intend to convert the redemption proceeds or dividends paid or sale proceeds (in RMB) into a different currency, they are subject to the relevant foreign exchange risk and may incur substantial capital loss from such conversion.

 

f. Difference in trading days and trading hours
Same as ETFs with overseas underlying, there are differences between the trading days and trading hours of the Mainland China and Hong Kong exchanges. For example, in the case when the Shanghai and Shenzhen exchanges are open and Hong Kong is closed (e.g. due to a public holiday in Hong Kong but not in Mainland China), the value of the securities in the RQFII A-share ETF’s portfolio may change while no trading is conducted in the Hong Kong market and investors will not be able to purchase or sell units of the RQFII A-share ETFs.
On the other hand, differences in trading hours between Shanghai and Shenzhen exchanges and Hong Kong may increase the level of premium/discount of the unit price to its NAV since the underlying Mainland markets are closed while Hong Kong is still open (e.g. between 3pm to 4pm).
A-shares are subject to trading bands which restrict increases and decreases in the trading price, while securities listed on the Exchange are not. This difference may also increase the level of premium/discount of the unit price to its NAV.

 

g. Mainland brokerage risk
Manager of an RQFII A-share ETF can only appoint one broker in Mainland China for each market (the Shenzhen Stock Exchange and the Shanghai Stock Exchange) in Mainland China to conduct trading.  Hence, an RQFII A-share ETF will rely on only one broker for each market (which may be the same broker). If the manager of the RQFII A-share ETF is unable to use the relevant broker in Mainland China, the operation of the RQFII A-share ETF would be adversely affected and may cause units of the ETF to trade at a premium or discount to the ETF’s NAV or unable to track the underlying index. 

 

h. Government intervention and restriction risk
Governments and regulators may intervene in the financial markets, such as by the imposition of trading restrictions which may affect the operation and market making activities of RQFII A-share ETFs. 

 

 

i. New ETF manager and reliance on parent company
The manager of RQFII A-share ETFs may be inexperienced in managing ETFs and may heavily leverage on the expertise and system of its parent company (sometimes the Investment Adviser of the ETF) to support the ETF’s investments in the A-share market.
Any disruption in the support from and communications with the Mainland parent company may adversely affect the operations of the RQFII A-share ETF.

  

6.10.8

Are RQFII A-share ETFs eligible as Trading Support Facility (TSF) stocks?

ETFs with equity underlying assets including RQFII A-share ETFs are eligible as TSF stocks. Please see the list of TSF stocks.  However, ETF market makers are not able to make use of the TSF.
 

Please click here to refer to a list of FAQs on Dual Counters for ETFs.

 

For further details, please refer to “RQFII A-share ETFs” under the “Products & Services” section of the HKEX website.