China fund with US stocks halts trading to calm investor fever

A security guard stands at the Shanghai Stock Exchange building at the Pudong financial district in Shanghai, China, as the country is hit by an outbreak of a new coronavirus, Feb 3, 2020. REUTERS/Aly Song/File Photo

SHANGHAI  – A Shanghai-listed fund that holds U.S. stocks took the unusual step of suspending trading on Friday, saying it was necessary to protect investors after prices hit record levels in a scramble for overseas assets.

Trading in the exchange-traded fund (ETF) that tracks the MSCI USA 50 Index was halted for the afternoon session, after a one-hour suspension in the morning failed to reduce hefty price premiums.

“We caution investors of the risks in the secondary market price premiums,” the ETF’s manager, E Fund Management Co said in a statement. “Investors who invest blindly could suffer major losses.”

ETFs trade like stocks on exchanges, with prices determined by supply and demand, but also tethered to their net asset value (NAV). This week, the price premiums of China-listed ETFs that invest in overseas markets, such as the United States and Japan, surged to record highs as Chinese shares plunged.

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The E Fund MSCI USA 50 Index ETF last traded at 1.52 yuan ($0.2117) on Friday, 43 percent higher than its NAV of 1.07 yuan.

Typically, such premiums would trigger arbitrage activities whereby the ETF manager issues more fund shares in the primary market until the price gap vanishes.

But such a mechanism does not work for outbound ETFs in China, where capital controls restrict overseas investment.

“Secondary ETF prices … are affected by supply and demand, and subject to systematic and liquidity risks, so investors could face potential losses,” said E Fund Management, which has repeatedly warned investors of the risks this week.

($1 = 7.1788 Chinese yuan renminbi)