Global index funds seek to shift out of Chinese ADRs

SHANGHAI/HONG KONG, Apr 13 (Reuters): Global index-tracking fund managers with exposure to US-listed Chinese firms are pushing index providers to swap into their Hong Kong-traded peers as delisting risks threaten to roil the $37 billion market for China-focused exchange-traded funds (ETFs).
Washington is demanding complete access to the audit papers of these firms, a request so far denied by Beijing. Without a solution, Chinese American Depositary Receipts (ADRs) will be delisted by 2024, potentially bashing ETFs with big ADR exposure.
"We have proactively engaged all of our index providers on the risks associated with ADR delisting," said Brendan Ahern, CIO of Krane Funds Advisors, which manages China-focused ETFs based on CSI and MSCI indices.
"Passive ETF managers will want their index providers to transition from ADRs to the HK share classes in order to avoid tracking error," he said, referring to the unwelcome performance difference between an ETF and the index it tracks.
"Index providers are moving at varying speeds," he added.
ETF managers including CSOP Asset Management and Samsung Asset Management said they have also nudged their index providers to swap Chinese ADRs into Hong Kong-traded peers, where available.