Indian investors paying hefty premiums to invest in China markets

Only two ETFs with China exposure available in domestic markets going at a premium

Indian investors are paying hefty premiums to invest in China markets, with stocks there posting their biggest weekly gain in nearly 16 years.

Savvy investors were seen making a dash to invest in the only two China-focused exchange-traded funds (ETFs) available in the domestic markets.

On Friday, Mirae Asset Hang Seng Tech ETF closed at Rs 16.9 on the NSE, nearly 7 per cent higher than its indicative net asset value (iNAV) or the fair value of Rs 15.9. Likewise, the Nippon India ETF Hang Seng BeES ended the session at a 6 per cent premium over its iNAV.

According to mutual fund (MF) officials, the premium was a result of high demand for the ETFs coupled with a lack of supply of new ETF units.

"There are limited MF investment options for China exposure. With the Chinese market starting to go up, the demand has shot up. However, the number of ETF units available for trade remains the same as fund houses cannot create fresh units due to the limitations on foreign investments," said a senior executive.

In January 2022, Sebi had to stop fund houses from taking fresh subscriptions in schemes investing in overseas stocks after the industry exhausted its international investment limit of $7 billion. The industry was later offered leeway to invest, provided the overall exposure remains lower than the February 2022 levels.

However, most international funds have largely remained closed for fresh investments. As a result, the ETFs have been the only available route for investment.

This has led to ETFs trading at high premiums on several occasions over the past two years. In April 2024, Mirae Asset Mutual Fund cautioned investors that its international ETFs were trading at significant premiums, asking them "to take precautions while buying the ETFs on the exchange and also to put 'limit order' while buying and selling the overseas ETFs after looking/referring to the iNAV published on the AMC's website".

The CSI 300 Index, a gauge for performance of big Chinese companies, rose 4.5 per cent, extending its weekly gain to 15.7 per cent — most since 2008. Meanwhile, Hong Kong's Hang Seng Index surged 13 per cent this week, marking its best weekly gain in 26 years. The rally was led by Beijing's stimulus measures, including the People's Bank of China (PBC) cutting the amount of cash that banks must hold as reserves by 0.50 percentage points.

The interest of Indian investors is also led by a steep valuation differential between the Indian and Chinese equity markets.

The demand for the Hang Seng ETFs was also visible in the volumes. In NSE, the number of trades in Nippon India ETF Hang Seng BeES stood at 10,254 on Friday compared to an average of 3,605 in the previous 20 sessions. The total value of trades stood at Rs 31 crore vis-a-vis the average of Rs 4.7 crore in the previous 20 sessions.

Similarly, the total value of trades in Mirae Asset Hang Seng Tech ETF jumped to nearly Rs 26 crore in the NSE compared to an average of Rs 2.3 crore in the previous 20 sessions.