KraneShares On ETFs For Future China

September 10, 2013

A latecomer China ETF sponsor is planning products for the country's next five years.

Kraneshares, a newcomer to the ETF space, recently launched a pair of China-focused ETFs: the KraneShares CSI China Five-Year Plan ETF (KFYP) and the KraneShares CSI China Internet ETF (KWEB).

In an interview with IndexUniverse ETF Analysts Dennis Hudachk and Howard Lee, KraneShares Managing Director Brendan Ahern spoke about why the firm’s funds are different from the current suite of available China ETFs. Ahern also discussed China’s latest Five-Year Plan, and how the new regime in China is serious about implementing changes to pursue a more sustainable growth model for the long term. Despite the recent rout in emerging markets, he sees opportunities in China.

IU: Tell us a bit about China’s Five-Year plan, and what KFYP attempts to do.

Ahern: It’s the goals for the country for the next five years and a top-down-driven government plan. It’s social, it’s cultural, but it’s becoming more around the economy, and where the Chinese government wants to push its economic goals. The latest five-year plan, which is the 12th five-year plan, focuses on seven strategic or focused industries.

Traditional benchmarks are very heavily weighted to two sectors, predominantly financials and energy. In some cases, financials represent over 50 percent of the sector weighting of ETFs. We don’t believe that half of the 1.3 billion people in China work in finance. Working with CSI—China Securities Index Company—the largest index provider in mainland China, we wanted to look for a way to capture where China is going.

Certainly, we wanted to do this in a passive format. We’re not active managers, and we’re certainly not fundamental investors or fundamental indexers. So we wanted to capture these seven focus industries, where the Chinese government is literally investing hundreds of billions of dollars in its attempt to reorient the economy away from a fixed investment to more of a domestic consumption-driven economy.

IU: Could you give us more insight into what those seven strategic industries are?

Ahern: The seven are energy conservation and environmental protection, new-generation information technology, the biological industry, high-end equipment manufacturing, the new energy industry, the new material industry, the new energy automobile industry, and then within the broader context is the theme of urbanization and domestic consumption.

As of last year, there were more urban dwellers in China than rural dwellers. The New York Times, just about a month ago, ran a front-page article on the Chinese government’s goal of moving another 250 million of its population from rural, agricultural-driven areas into urban centers.

The Chinese government is trying to move up-market, moving its industries from the FoxConns, which is really a low-cost manufacturer, into more of a Siemens-like model, which is more high-grade manufacturing. You don’t turn the world’s second-largest economy on a dime, but you feel that owning these underlying sectors and subsectors represented in the five-year plan is a highly differentiated approach.

We believe the new regime that came into leadership in March is really adhering to this reform-minded agenda, and investors need to be aware that there’s been a change in China that I think a lot of the headlines out there don’t really capture.

IU: What about agriculture? Is KFYP indirectly exposed to that sector at all?

Ahern: Certainly the mechanization of agriculture plays a part as well. In general, food safety is a very important trend in China. You see that most recently with the Smithfield deal here in the U.S., where Chinese companies can be buying the largest pork producers here in the U.S. Part of that is because the U.S. has an institutional food structure in place. And conversely, in China, it’s really small, family-owned farms.



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