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Global index funds seek to move away from China ADR on delisting According to Reuters

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© Reuters. FILE PHOTO: A man stands on an overpass with an electronic board showing the Shanghai and Shenzhen stock indexes, at the Lujiazui financial district in Shanghai, China January 6, 2021. REUTERS/Aly Song/ / File Photo

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By Samuel Shen and Selena Li

SHANGHAI/HONG KONG (Reuters) – Global index-tracking fund managers with exposure to U.S.-listed Chinese companies are pushing index providers to swap into peers was traded in Hong Kong because of delisting risks that threaten to upset the $37 billion market for China-focused exchange-traded funds (ETFs).

Washington is demanding complete access to the audit papers of these companies, a request that has so far been denied by Beijing. Without a resolution, the Chinese American Depository Receipt (ADR) will be delisted in 2024, potentially hitting ETFs with large ADRs.

“We have actively engaged all of our index providers,” said Brendan Ahern, CIO of Krane Funds Advisors, which manages China-focused ETFs based on the CSI and MSCI indexes. us about the risks involved in delisting ADR.

“Passive ETF managers will want their index providers to switch from ADRs to HK share classes to avoid tracking errors,” he said, referring to the unexpected performance difference between ETF and the index it tracks.

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

ETF managers including CSOP Asset Management and Samsung (KS:) Asset Management said they have also pushed their index providers to swap Chinese ADRs into Hong Kong-traded counterparts. , if any.

Some smaller index companies, such as China Securities Index Co, said they had begun to convert but those like the S&P Dow Jones Indices and MSCI were more cautious, citing the need for more clarity around Sino-US audit talks, and concerns about the relatively low level of liquidity in Hong Kong.

In addition, many active fund managers, not driven by the need to track the index, sold ADRs or made the switch to Hong Kong shares.

TRACKING ERRORS

The ADR ratio of the new S&P China Regional Index ETF, run by CSOP, has fallen to 6% from more than 30% a year ago following discussions between the Hong Kong-based asset manager Kong and index provider, said Wang Yi, portfolio manager.

Last month, China Securities Index publisher China Securities Index began to prioritize the inclusion of stocks listed in Hong Kong in the CSI Overseas China Internet Index, when a company has multiple qualified listings to choose from. choose.

The index is tracked by a $6 billion ETF run by KraneShares and many other index funds.

Others are also holding out.

Earlier this month, China proposed rules that could potentially give US regulators access to the audit work papers of Chinese companies, as Beijing seeks to strike a deal. agreement to keep China’s ADRs listed.

Mike Shiao, chief investment officer of Invesco, Asia outside of Japan, said the redundancies for US-listed Chinese companies have been “partially eliminated”, but Invesco, which runs the fund ETF heavily invested in ADR, will continue to monitor the US reaction.

S&P Dow Jones declined to comment on potential changes to the methodology, while MSCI and Russell also declined to comment.

Affirming the impatience of some investors, the KraneShares CSI China Internet ETF said last month that it aims to fully convert to Hong Kong stocks in the coming months.

“Is an ETF convertible without an index provider? Yes, although it would introduce tracking errors,” KraneShares’ Ahern said. “Obviously people would rather make a tracking mistake than hold a stock through delisting,” he said.

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