Global index funds seek to shift out of Chinese ADRs as delisting looms

div classBodysc17zpet90 cdBBJodivpBy Samuel Shen and Selena Lip

pSHANGHAIHONG KONG Reuters – Global indextracking fund managers with exposure to U.S.listed Chinese firms are pushing index providers to swap into their Hong Kongtraded peers as delisting risks threaten to roil the 37 billion market for Chinafocused exchangetraded funds ETFs.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pWashington is demanding complete access to the audit papers of these firms, a request so far denied by Beijing. Without a solution, Chinese American Depositary Receipts ADRs will be delisted by 2024, potentially bashing ETFs with big ADR exposure. p

p“We have proactively engaged all of our index providers on the risks associated with ADR delisting,” said Brendan Ahern, CIO of Krane Funds Advisors, which manages Chinafocused ETFs based on CSI and MSCI indices.p

p“Passive ETF managers will want their index providers to transition from ADRs to the HK share classes in order to avoid tracking error,” he said, referring to the unwelcome performance difference between an ETF and the index it tracks. p

p“Index providers are moving at varying speeds,” he added.p

pETF managers including CSOP Asset Management and Samsung Asset Management said they have also nudged their index providers to swap Chinese ADRs into Hong Kongtraded peers, where available.p

pSome smaller index companies, such as China Securities Index Co, said they have started the switching but the likes of S&P Dow Jones Indices and MSCI are more cautious, citing the need for further clarity around SinoU.S. audit talks, and concerns over relatively low liquidity levels in Hong Kong. p

pAlso, many active fund managers, unfettered by indextracking needs, have already dumped ADRs, or made the transition to Hong Kong shares.p

pTRACKING ERRORSp

pADR exposure of the S&P New China Sector Index ETF, run by CSOP, has decreased to 6 from over 30 a year ago after discussions between the Hong Kongbased asset manager and its index provider, portfolio manager Wang Yi said.p

pLast month, Chinese index publisher China Securities Index started prioritising inclusion of Hong Konglisted stocks for its CSI Overseas China Internet Index, when a company has multiple listings eligible for selection. p

pThe index is tracked by a 6 billion ETF run by KraneShares and many other index funds.p

pOthers are also holding out.p

pEarlier this month, China proposed rules that would potentially give U.S. regulators access to Chinese companies audit working papers, as Beijing seeks to reach a deal to keep Chinese ADRs listed.p

pMike Shiao, Invescos chief investment officer, Asia exJapan, said the overhang on U.S.listed Chinese companies was “partially” removed, but Invesco, which runs an ETF heavily invested in ADRs, would continue to monitor the U.S. response.p

pS&P Dow Jones declined comment on potential changes to methodologies, while MSCI and FTSE Russell also declined comment.p

pUnderscoring some investors impatience, the KraneShares CSI China Internet ETF said last month that it aimed to fully transition to Hong Kong shares in coming months.p

p“Could an ETF convert without the index provider？ Yes, though it would create tracking error,” KraneShares Ahern said. “Obviously one would rather have tracking error versus holding a stock through a delisting,” he said.p

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pp Reporting by Samuel Shen in Shanghai and Selena Li in Hong Kong Editing by Anshuman Daga & Shri Navaratnamp

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