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China A-Shares Attractive after Steep Fall but A50CHTK-C1 out of time

China A-shares traded on mainland China exchanges become attractive valuation wise after steep decline in the past couple of months.  Up until 31st May 2010, the FTSE/Xinhua China A50 index, which tracks large free-float China shares listed in Shanghai and Shenzhen, is down about 25% for the year.  The iShares FTSE/Xinhua A50 China Tracker (SEHK: 2823) is an ETF listed in Hong Kong which track the performance of the index.  The ETF is currently trading at premium to NAV (Net Asset Value) of close to 10%.  This is the highest level of premium according to the NAV premium/discount table provided by the fund.

 

The constituents of FTSE/Xinhua China A50 index comprise mainly finance stocks, accounting for about 61% of the fund.  Its biggest component stocks include the likes of Ping An Insurance, China Merchants Bank, Industrial Bank, Bank of Communications etc.  The discount between H-shares traded in Hong Kong and its correspondent A-shares traded in mainland China has narrowed substantially.  Most banks and insurance companies H-shares are actually trading at a premium to their A-shares.  This possibly leads to the basket of stocks (A-shares) in A50 ETF trading at a discount to their H-shares in Hong Kong although not all shares in FTSE/Xinhua China A50 have H-shares listed in Hong Kong.  It is therefore not surprising to see A50 ETF trading at a premium as foreign investors see value in the fund.  Nevertheless, arbitrage activities should limit the premium of the ETF as a 10% premium is too attractive for the qualified institutions which can create more units of the fund.

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