The China A-Share Problem: ASHS

July 24, 2015

As I’ve said recently, the Chinese interference in the A-share market has fundamentally broken things for U.S. investors. Many of the interventions will just play out in the inefficient allocation of capital—the lockups on institutional shareholders, the rigorous use of debt to finance equity purchases, etc.

But for U.S. investors actively playing the situation in China, there’s a much more fundamental problem: the trading locks. China has simplyseemingly almost at random—closed various A-shares for trading.

As a U.S. investor who is not actually on the ground in mainland China, this leads to significant information gaps. Nowhere is this more evident than in the Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETF (ASHS | F-67).

Great Option To Have

To start with, let me say that I love this ETF. It scored poorly in our system (F-67) because it’s expensive, at 80 bps, and hasn’t tracked its index perfectly. But I love that the fund exists as an option for the adventurous international investor. It directly holds the 500 smallest-cap stocks listed in mainland China, which turn out to be not that small: The weighted average market cap is more than $3 billion. Most of the portfolio would firmly be considered midcap by U.S. standards. In other words, despite the name, these are not fly-by-night penny stocks.

However, to halt the decline in the local markets, China has locked a host of these firmswhich are current holdings of ASHS—out of the market, and in some cases, since since 2014.

The last recorded trade in Ningxia Zhongyin Cashmere Co., Ltd. Class A (000982-CN) was Aug. 2211 months ago. More typically, a ton of stocks were suspended in from trading back in May, leading to more than 100 charts from the portfolio that look like this, top holding Eternal Asia Supply Chain Management (002183-CN):

And yet these stocks remain in both the CSI 500 Index and ASHS.

This completely breaks any ability for investors to really understand the “fair” price of their holdings in ASHS.

Breaking It Down

First, let’s take a look at what’s happened with ASHS here in the U.S. over the last month:

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