Shanghai's State-Owned Enterprise Reform Provokes ETF Feeding Frenzy
Yicai Global
/SOURCE : Yicai
Shanghai's State-Owned Enterprise Reform Provokes ETF Feeding Frenzy

(Yicai Global) Aug. 05 -- Since the launch of the Shanghai SOE reform Exchange Traded Fund (ETF), the product has proved "simply matchlessly popular", according to a source at Orient Securities.

Sales of the fund hit CNY377 million (USD56.7 million) on the first day, with many major shareholders of the constituent stocks becoming unit holders of the fund through cash subscription or share swap. The launch of the fund also led to a rally among relevant stocks.

Shanghai has become the forerunner of reform of state-owned enterprises, having classified them into three categories - competitive, functional, and public, in order to focus on specific reforms.

Investors have high hopes for the Shanghai SOE reform ETF, and listed SOEs from the city gained in popularity among equity investors. Some sell-side analysts recently issued research reports recommending Shanghai SOE reform related stocks, and some of them were actively traded in July. Shanghai Lingang Holdings Corporation Limited, for example, rose over 20 percent this month.

Market experts pointed out that some of the subscribers to the fund are state-owned asset shareholders of constituent companies of the ETF, and have swapped equity in listed companies for units of the ETF fund. This is best illustrated by the example of Shanghai International Port (Group) Co., Ltd., which announced that its state-owned asset shareholder, Shanghai Municipal Investment (Group) Corporation, sold 300 million shares in the company for the ETF.

On the same day, Shanghai Jiao Yun Group announced that its state-owned asset shareholder, Shanghai Jiushi (Group) Co., Ltd. sold 34,494,900 shares in the company for equivalent units of the Shanghai SOE reform ETF.

Some companies, keen to take advantage of investment being led by state reform and consolidation of state enterprises, with a consequent drive to reduce the number of zombie, or inefficient business entities, subscribed to the fund in cash. Shanghai Lansheng Corporation similarly subscribed to the ETF with its own funds.

Some market participants believe that the feeding frenzy in the acquisition of ETF stock among listed companies is caused by two factors. Firstly, the ETF offers better liquidity relative to individual stocks, and by allocating to the ETF, companies can optimize their asset structures. The second factor is the prevalent preference of the Shanghai SOE ETF over other funds is a clear manifestation of the strong optimism about SOE reforms in Shanghai among investors.

However, some market participants are cautious about the Shanghai SOE reform as a new investment theme. According to Fu Juan, Investment Director at a bank in Shanghai, the fund will have a positive impact on share prices of listed SOEs in Shanghai overall, but it does not necessarily mean that the price of every relevant individual stock will go up.

Data announced by Universal Fund show that the Shanghai SOE reform ETF raised a total of CNY15.22 billion, ranking it among the seven largest ETFs in China.

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