RQFII A share ETF
What is a Renminbi Qualified Foreign Institutional Investor (RQFII) A share exchange traded fund (ETF)?
RQFII A share ETF is a renminbi-denominated physical A share ETF. Through the RQFII investment quota granted by Mainland authorities, an RQFII A share ETF seeks to track the performance of an A share index by channelling the renminbi raised outside mainland China to invest directly in a portfolio of A shares. The information in the following FAQs is applicable to SFC-authorized RQFII A share ETFs that are available to public investors.
RQFII A share ETFs are traded on the Stock Exchange of Hong Kong (SEHK) like stocks. Like other ETFs listed on the SEHK, RQFII A share ETFs must be authorized by the SFC before they can be offered to the investing public.
Before investing in any RQFII A share ETF, you should read its offering document including the product key facts statement (Product KFS) carefully to understand its key features and risks.
What are the key differences in structure and trading between RQFII A share ETFs and other A share ETFs currently traded on the SEHK?
RQFII A share ETFs Other A share ETFs Investment strategy and replication/ tracking method
- Physical full replication or representative sampling
- Direct investment in the Mainland securities markets through RQFII investment quota
- Invest directly in A shares that replicate or represent the composition of the underlying A share index
- Synthetic replication
- Primarily invest in derivative instruments to replicate the underlying index performance
Trading currency Renminbi and possibly in some cases HK dollar as well (Note) HK dollar
Note: The manager of individual RQFII A share ETF may choose to adopt the dual counter model to simultaneously offer ETF units in different trading currencies (ie renminbi and HK dollar).
What transaction costs are involved in RQFII A share ETF trading
RQFII A share ETFs, being listed renminbi-denominated securities, are generally subject to:
- brokerage commission,
- SFC levy,
- SEHK trading fee, and
- other fees and charges.
Brokerage commission is charged at the market rate and in a currency decided by the intermediaries (brokerage or bank) that you are using. Currently, SFC levy and SEHK trading fee on purchases and sales of listed renminbi-denominated securities are paid by intermediaries to Hong Kong Exchanges and Clearing Limited (HKEx) in HK dollar, based on an exchange rate determined by the Hong Kong Monetary Authority on the day of the trade. The exchange rates are published on the HKEx website by 11 am on each trading date.
Before investing in any RQFII A share ETF, you should also check with your intermediaries on details of all fees related to RQFII A share ETF trading, payment process including the currency that you should use for settling such fees and how they set the exchange rate to be used if any currency conversion is required in the transaction.
Can I trade RQFII A share ETFs on margin?
Although investors may be able to get margin financing in HK dollar from brokerages or banks for stock trading, under the current agreement between banks and the Clearing Bank for Renminbi Business in Hong Kong, banks are not permitted to lend renminbi to personal customers.
For non-bank financial institutions, such as brokerages, such a restriction is not applicable. However, if you want to purchase RQFII A share ETFs using a credit or margin facility, you should check with your brokerages first on the availability of such a facility and the detailed arrangements. Whether a brokerage would provide financing services or finance individual customer is a commercial decision of the brokerage.
Besides, you should carefully study the terms of the credit/margin facility and understand the risks of margin trading. In particular, you should enquire with your brokerage the currency in which the margin loan would be denominated and the currency in which margin call and loan repayment would be settled, and pay special attention to any risks of currency mismatch and exchange rate fluctuations which may arise from such trading. You should note that margin trading is not suitable for everyone.
Will I be able to trade RQFII A share ETFs even if the stock exchanges on the Mainland are closed?
As RQFII A share ETFs are traded on the SEHK, you will be able to trade their units during trading hours of the SEHK, even if the stock exchanges on the Mainland are closed. However, there are risks associated with the differences in trading days or hours between stock exchanges on the Mainland and the SEHK. For details, please refer to the "trading differences risk" in below
What are the key risks involved in RQFII A share ETFs?
RQFII A share ETFs are subject to the risks which are applicable to ETFs in general. For details, please click here. In addition, RQFII A share ETFs are also subject to the following key risks.
Risks relating to the novelty of the product
RQFII A share ETF is the first renminbi physical A share ETF issued outside mainland China to invest directly in the Mainland A share market which is inherently a market with restricted access. The novelty and untested nature of such products make them riskier than traditional ETFs investing directly in markets other than the Mainland.
Risks relating to the RQFII regime
The RQFII policy and rules have only been announced in recent years and there may be uncertainties as to its implementation. Such policy and rules are subject to change and interpretation by Mainland authorities. The uncertainty and change of the laws and regulations on the Mainland (including the RQFII policy and rules) may adversely impact the RQFII A share ETFs. The limit of RQFII investment quota may cause units of RQFII A share ETFs to trade at a significant premium to their NAV. For details, please refer to next question below.
Renminbi currency risk
Renminbi is currently not freely convertible and is subject to exchange controls and restrictions. Since RQFII A share ETFs are denominated in renminbi, non-renminbi based investors are exposed to fluctuations in the renminbi exchange rate against their base currencies. Like any currency, the exchange rate of renminbi may rise or fall. Investors who choose to convert the redemption proceeds or dividends paid by the RQFII A share ETF or sale proceeds into a different currency may incur substantial capital loss due to foreign exchange risk.
Risks relating to Mainland markets and concentration risk
RQFII A share ETFs primarily invest in securities in the Mainland markets and are subject to concentration risk.
Investing in the Mainland markets involve certain risks and special considerations as compared with investment in more developed economies or markets, such as greater political, tax, economic, foreign exchange, liquidity and regulatory risks.
Risks relating to renminbi trading and settlement of units
It is likely that not all intermediaries are prepared to carry out trading and settlement of renminbi-denominated securities. In addition, the liquidity and trading price of the units of RQFII A share ETFs may be adversely affected by the limited availability of renminbi outside mainland China and the restrictions on the conversion between foreign currency and renminbi.
Hong Kong Exchanges and Clearing Limited (HKEx) has expanded the scope of the Renminbi Equity Trading Support Facility (TSF) to enable investors who have insufficient renminbi to buy renminbi-traded units of RQFII A share ETFs in the secondary market with HK dollars. For details about this arrangement and the list of securities supported by the TSF, please refer to HKEx's website.
Risks relating to Mainland capital gains tax liability
While the Mainland authorities announced the capital gain tax ("CGT") policies on RQFIIs with effect from 17 November 2014 to clarify certain aspect of its application, there are still risks and some residual uncertainties associated with the current Mainland tax laws, regulations and practice in respect of capital gains realised by ETF on its investments in the Mainland (eg in relation to equity investments made before 17 November 2014 and tax treatment on investments in fixed income securities).
It is a matter of professional and commercial judgement on the part of each fund manager, acting in the best interest of investors after taking professional tax advice, to consider and decide the provisioning policy for the ETF’s potential CGT liability or to change the ETF’s existing CGT provisioning policy from time to time. As a result, each ETF's tax provisioning policy may be different. There may be ETFs without making any CGT provision at all. Even if an ETF makes CGT provision, such provision may be excessive or inadequate.
The Mainland tax rules and policies are subject to changes. There are risks that CGT may be enforced by the Mainland tax authorities and that such enforcement may be on a retrospective basis. If and when CGT is collected by the Mainland tax authorities, any shortfall between the provisions (if any) and actual tax liabilities will have to be paid out of the ETF's assets and could have a material adverse impact on the ETF's net asset value (NAV), whereby causing significant losses to investors.
Enforcement of the CGT by the Mainland tax authorities and/or change in tax provisioning policy by a fund manager will impact investors remaining in the ETF. Investors who have sold/redeemed their interests prior to such enforcement and/or change will not be impacted. Likewise, such investors will not benefit from any release of tax provisions back into the ETF. Investors may be advantaged or disadvantaged depending upon whether and how the CGT will ultimately be taxed and when the investors invest in the ETF.
Investors should carefully read the CGT provisioning policy of an ETF and the associated risks as disclosed in the offering documents before investing in the ETF. If in doubt, they should consult their professional advisors.
Trading differences risk
The trading days or hours of the Mainland and Hong Kong stock markets are not exactly the same. For example, there may be occasions when A share markets are open while SEHK is closed and RQFII A share ETFs are not traded. As such, the value of the securities in the RQFII A share ETF's portfolio may change but investors are not able to purchase or sell the units of the RQFII A share ETF.
On the other hand, if a Mainland stock exchange is closed while the SEHK is open, the market price of underlying securities may not be updated while the RQFII A share ETF is still trading, which may affect the level of premium/discount of the trading price of the ETF's units to its NAV.
While A shares are subject to trading bands which restrict increases and decreases in the trading price, trading of RQFII A share ETFs listed on the SEHK is not subject to such restrictions. This difference may affect the level of premium or discount of the trading price of the ETF's units to its NAV.
Mainland brokerage risk
Mainland broker(s) will be appointed to execute transactions (ie trading of A shares) for the RQFII A share ETF in mainland China. There is a possibility that only one brokerage may be appointed for each market (the Shenzhen Stock Exchange and the Shanghai Stock Exchange), which may be the same brokerage. If the manager of the RQFII A share ETF is unable to use its designated brokerage in mainland China, the operation of the RQFII A share ETF will be adversely affected and may cause the units of the RQFII A share ETF to trade at a premium or discount to the RQFII A share ETF's NAV or the RQFII A share ETF may not be able to track the underlying index.
Government intervention and restrictions risk
The operation and market making activities of RQFII A share ETFs may be affected by interventions by the governments and regulators in the financial markets, such as an imposition of trading restrictions, a ban on "naked" short selling or the suspension of short selling for certain stocks.
New manager and reliance on parent company risk
The manager of RQFII A share ETFs may not be experienced in managing ETFs and may heavily leverage on the expertise and systems of its Mainland parent company to support the RQFII A share ETF's investments in the A share markets. Any disruption in the assistance from the Mainland parent company may adversely affect the operations of the RQFII A share ETF.
Reliance on market maker risk
Market makers may not be as interested in making a market in ETF units denominated in renminbi. Any disruption to the availability of renminbi may adversely affect the capability of market makers in providing liquidity for the units of RQFII A share ETFs. The liquidity of the ETF may be adversely affected if there is no market maker for the fund or if the market making activities are not effective.
What is a Dual Counter RQFII A share ETF?
An RQFII A share ETF with Dual Counter offers two trading counters on SEHK (i.e. renminbi (RMB) counter and Hong Kong dollar (HKD) counter) to investors for secondary trading purposes. Units traded in RMB counter will be settled in renminbi and units traded in HKD counter will be settled in Hong Kong dollar.
Units traded on both counters are of the same class and all unitholders of both counters are treated equally. The two counters will have different stock codes, different stock short names and different ISIN numbers for identification.
Normally, investors can buy and sell units traded in the same counter or alternatively buy in one counter and sell in the other counter provided their intermediaries (eg brokerages or banks) provide both Hong Kong dollar and renminbi trading services at the same time and offer inter-counter transfer services to support Dual Counter trading. Inter-counter buy and sell is permissible even if the trades take place within the same trading day.
For details about the Dual Counter model for RQFII A share ETFs, please refer to the FAQs published by HKEx on its website.
What are the key risks involved in Dual Counter RQFII A share ETFs?
New model risks
The Dual Counter model in Hong Kong is new. Dual Counter RQFII A share ETFs allow units to be traded on SEHK in renminbi and Hong Kong dollar under two separate counters. The novelty and untested nature of Dual Counter RQFII A share ETFs may bring additional risks for investment in Dual Counter RQFII A share ETFs.
Inter-counter trading risks
If your intermediary (eg brokerage or bank) does not provide both Hong Kong dollar and renminbi trading services at the same time or offer inter-counter transfer services to support Dual Counter trading, you will not be able to buy units traded in one counter and sell them in the other counter. Even if your intermediary is able to provide such service, it may impose an earlier cut-off time, other procedures and fees.
Risks relating to different trading prices in RMB and HKD counters
The RMB counter and HKD counter are two distinct and separate markets. The trading prices of units of the same RQFII A shares ETF in the two counters may be different and may not always maintain a close relationship depending on factors such as market supply and demand, liquidity in each counter and the exchange rate between renminbi and Hong Kong dollar in both onshore and offshore markets.
Risks relating to dividend payment
Dividends of a Dual Counter A share RQFII A share ETF are declared in renminbi but may be paid in renminbi only or, where so offered by the manager, in renminbi as well as Hong Kong dollar depending on an investor's election.
Depending on the distribution policy of individual Dual Counter RQFII A share ETF, an investor of units traded in the HKD counter may receive dividend in renminbi only. In such circumstances, if such investor does not have an renminbi account, he or she may have to bear the fees and charges associated with the conversion of such dividend from renminbi into Hong Kong dollar or any other currency.
Is there any specific condition on RQFII A share ETFs that may lead to the suspension of new unit creation?
RQFII A share ETFs may suspend the creation of new units when, among others:
- the RQFII investment quota is used up, and
- the RQFII holder cannot obtain additional quota in a timely manner.
In such event, the units of RQFII A share ETFs may trade at a significant premium to their NAV.
What are the key differences between RQFII A share ETFs and other existing RQFII retail funds currently available to Hong Kong investing public?
RQFII A share ETFs RQFII retail funds RQFII quota requirement ✓ ✓ Listing on SEHK ✓ X Underlying investment A shares traded in the Mainland markets Generally invest in the Mainland stock market and bond market (including the inter-bank bond market and exchange-traded bond market)
What should investors consider before investing in an RQFII A share ETF?
You should read carefully the offering document including the Product KFS to fully understand the nature, investment objective and strategy, key features, major risks and dividend policy of an RQFII A share ETF.
Assess whether the product is suitable for you in light of your investment objectives, the amount of investment required and your risk appetite.
An RQFII A share ETF may not necessarily give you the benefits of appreciation in renminbi (if any).