After the quick plunge in Chinese equities, a large chunk of mainland stocks have stopped trading to stem the exodus. However, U.S.-listed China A-shares exchange traded funds continue trading at a steep discount to the underlying market.
About 1,331 companies, with a combined value of about 40% of the country’s market, have stopped trading on China’s stock exchange, reports Tracy Alloway for Bloomberg.
The Shanghai Composite index has plunged 32% below its June 12 peak as investors and companies unwind margin loans. Consequently, the risky practice of buying on margin has fueled the sell-off as investors tried to quickly offload positions.
“Stocks are being suspended by the companies themselves because many have bank loans backed by shares which the banks themselves may want to liquidate, joining the queues of margin sellers,” Nick Lawson at Deutsche Bank told Bloomberg.
Consequently, with a large chunk of Chinese company stocks stuck in limbo, China A-shares ETFs that track mainland stocks are now trading at a wide discount to their net asset value.
For instance, on Wednesday, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR) showed a 10.1% discount to NAV, KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) had a 8.4% discount to NAV and Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) was hovering around a 10.4% discount to NAV. Additionally, the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT), which tracks more mid-sized companies, traded at a discount of 19.5% to its NAV.
ETFs try to reflect the movement of their net asset value, or combined value of all securities in an ETF’s portfolio divided by the number of ETF shares outstanding, as market makers or authorized participants create or redeem ETF shares by buying or selling baskets of underlying securities for ETFs.
Since ETFs trade like any other stock on an exchange, the ETF’s price can fluctuate throughout the day. ETFs typically update their underlying trading value, calculating the approximate NAV every 15 seconds throughout the trading day.
For ETFs that track international markets, the ETFs will naturally show a wider discount or premium to NAV since the U.S.-listed ETFs may be trading while the underlying overseas market is closed. However, if the underlying market has suspended trading on stocks, the divergence between an ETF’s price and underlying components may be exacerbated.
A similar case with the Greece ETF, Global X FTSE Greece 20 ETF (NYSEArca: GREK), has occurred. The U.S.-listed GREK is still trading but Greece has shut down the Athens Stock Exchange entirely after the government extended a bank holiday. [While Athens Exchange is Closed, the Greece ETF Show Goes On]
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Max Chen contributed to this article.