Chinese traders ignore warning in chase for Japanese stocks, bidding ETF to daily limit of 10%

Chinese investors have ignored a warning from the issuer of the largest onshore exchange-traded fund (ETF) tracking the Japanese market, bidding the fund higher as they chase gains in the stocks.

The China AMC Nomura Nikkei 225 ETF rose to the daily limit of 10 per cent after trading resumed at 10:30am local time. The shares were suspended for an hour after the fund traded at a 9.5 per cent premium over its underlying net assets on Tuesday, which triggered caution from the fund’s manager.

“The transaction price in the secondary market is significantly higher than the reference net value of fund shares, resulting in a substantial premium,” China Asset Management said in a statement. “If investors invest blindly, they may suffer serious consequences.”

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Turnover in the China AMC Nomura ETF soared to a record 4.8 billion yuan (US$668 million) on Tuesday.

Most mainland China investors do not have overseas stock accounts and face capital controls, making ETFs one of the most convenient ways to bet on foreign stock markets.

“Gains of over 20 per cent last year in Japan gauges have altered the typical view that its economy is in a long-term recession and [that] the stocks are under downward pressure,” the China Securities Journal reported the fund’s portfolio manager Zhao Zongting as saying.

It is not uncommon for premiums of onshore ETFs tracking offshore assets to surge. The E Fund Crude Oil Fund soared as much as 118 per cent over the underlying shares in 2020 while the E Fund CSI Overseas China Internet 50 ETF Index Fund and Guotai Nasdaq 100 Index Exchange Traded Fund have seen premiums rising above 25 per cent.

While ETF price gaps are often quickly corrected, the deviation for Japan-related products might last.

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“The prices of Japan ETF funds are impacted by an increase of risk appetite and sometimes overheated sentiment by domestic investors, which brings high premiums,” according to Li RuiMin, fund manager of ICBC Credit Suisse Daiwa ETF. The fund is trading about 0.9 per cent higher on Wednesday, with a premium of 2.5 per cent, according to fund tracker Eastmoney.

“Retail investors should be rational and limit exposure and refrain from chasing gains when high premiums are present,” said Li.