FREE: First renminbi gold ETF explained

Author: | Published: 17 Feb 2012
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The world’s first renminbi-denominated physical gold exchange traded fund (ETF) listed on the Hong Kong stock exchange (HKEx) this week.

In a bid to capitalise on the surging appetite for both the Chinese currency and bullion, the Hang Seng Rmb Gold ETF will, according to its prospectus, hedge against the foreign exchange rate movements between Rmb and US dollar so that its performance in Rmb tracks the performance of the London gold fixing price in US dollar as closely as possible.

Such currency hedging will enable investors to go long gold and Rmb simultaneously. Those who hold Rmb can therefore use their funds to buy gold while also retaining their exposure to the Chinese currency, which is widely expected to appreciate against the US dollar.

But the lead partner on the deal, Simmons & Simmons’ Hong Kong funds group head, Rolfe Hayden, told IFLR that it took time to obtain Hong Kong’s Securities and Futures Commission (SFC) approval of the foreign currency exposure embedded in the fund.

"No one can predict whether Rmb will rise or fall against the US dollar any more than any other currency, so it took time to get the SFC comfortable with the unique risks associated with such foreign currency exposure and the disclosure required as a result of that," he said.

Listed SFC-authorised funds typically require a higher standard of disclosure, and listed ETFs even more so as they traditionally do not disclose any subjective analysis of underlying investments or value of acquisitions.

"Getting the right level of disclosure to satisfy the SFC that retail investors were to be adequately informed of the risks associated with trading in a listed Rmb ETF, and able to engage in secondary market activity was a challenge," said Hayden.

In tracking gold custodied outside Hong Kong, the product plays on increasing regional demand for commodities, commodity-linked products, and bullion. Its launch follows HKEx’s announcement last month that it planned to refocus on commodities as opportunities slow in the equities market, and the window for capturing China’s explosive commodity demand narrows.

The two other gold ETFs on the HKEx, the SPDR Gold Shares ETF and the Value Gold ETF, which are denominated in Hong Kong dollars, also track the performance of the London Bullion Market Association gold fixing price. The Value Gold ETF, the first indigenous Hong Kong physical gold ETF, stores its bullion at Hong Kong International Airport’s Precious Metal Depositary.

As the first domestic ETF to custody gold outside Hong Kong, the deal required more close interaction with the SFC, as the regulator took a much closer interest in ensuring that the custody arrangements complied with its requirements, said Hayden

The product has so far seen disappointing take-up. This could be in part due to volatility in the gold market, where prices fell over 16% in one month last September. Analysts are hopeful demand will pick up as market participants become familiar with the new product.

Hayden expected more precious metal Rmb ETFs, and possibly also R-QFII [Rmb Qualified Foreign Institutional Investor] ETFs would come to market this year.

Authorities and regulators are keen to develop Hong Kong as an asset management hub and as an institutional investment tool, favoured by hedge funds and asset managers, ETFs greatly compliment that drive, he said.