China Asset Management Company yesterday expressed its hope that it will launch China's first exchange-traded fund (ETF) within the third quarter of this year.

The fund will be based on the Shanghai Stock Exchange (SSE) 50 Index, which contains the 50 Chinese stocks with the biggest capitalization and liquidity.

Analysts said that this will be an important innovation in China's fund industry, although many preparations must be made to ensure that it gets off to a good start.

"The final timing for the ETF launch still depends on technical preparations, but we hope it will take place in late third quarter or in the fourth quarter," said Zhang Houqi, assistant president of China Asset Management Co.

The Beijing-based fund company sought a partnership with State Street Global Advisors - a leading global investment manager - after getting authorization earlier this year from the securities regulators and the stock exchange to develop the ETF product.

The two sides signed an agreement yesterday in Beijing to work on the SSE 50 ETF.

Partnership with State Street Global Advisors will provide the new product with technical support, said Zhang, adding that it can also help promote the new fund to overseas institutional investors.

The two companies are currently working together on issues including the technological system, investment management flowchart and marketing.

But the most important task confronting them is the most efficient application of overseas skills in the Chinese market.

An ETF is a listed security designed to track the performance of an established index or predetermined basket of securities.

It offers investors instantaneous exposure to local or global indices via a single trade and with comparatively low cost and increased flexibility.

By the end of 2003, 281 ETF products had been promoted worldwide, with an asset scale of US$211 billion, statistics said.

State Street Global Advisors was appointed as the fund manager of the Tracker Fund of Hong Kong when the fund, also Hong Kong's first ETF, was launched in 1999.

It is also the trustee of the S&P Depositary Receipt, the world's largest ETF.

Its new role as an adviser to China's first ETF will also bring it a prime opportunity to participate in the mainland's fund business, said Vincent Duhamel, the company's senior principal and chief executive.

He said the project has a "bright" future, but will also face many challenges.

Duhamel pointed out that every market has its special characteristics, with China being a large and complex one.

Much work has to be done on the designing of the ETF trading and operation system, regulations and investor education, he said.

The lack of index futures and arbitration tools and insufficient market liquidity are also major obstacles.

"It is a good thing for Chinese exchanges and fund managers to make such innovation as the ETF, but they have to tackle many issues to carry it out well," said Xue Jirui, a fund analyst at CITIC Securities Co.

On the one hand, China still has to go a long way to catch up with mature markets in terms of technology and infrastructure in regard to the nation's overall market conditions, he said.

For example, it would be better for the ETF to first establish a market maker system and introduce more risk-hedging tools like index futures.

China's financial authorities have pledged to step up the development of financial futures, including index futures, but a timetable has yet to be drawn up.

Moreover, ETF would require the active participation of securities houses and other institutions, so regulators should design rules to standardize the practice.

On the other hand, as ETF often traces the movement of an index and a basket of stocks, it is essential to have good market liquidity.

However, the number of large-cap blue chip stocks is still very limited in China, said Xue.

Source: Xinhua