Why is E. Sun Financial Holding Co. (Stock code: 00887) being audited by the Financial Supervisory Commission after the Chinese version of Grayscale appeared?

The price of the Yuanta China Technology 50 ETF 00887, which is linked to the Chinese stock market, has recently experienced abnormal fluctuations, with a premium of up to 223% at one point. This phenomenon was described by Chen Yen-liang, Vice Chairman of the Financial Supervisory Commission, as a "perfect little storm," and a special project has been set up to investigate the matter.

Yuanta China Tech 50 ETF 00887

Yuanta China Tech 50 ETF with stock code 00887 was launched by Yuanta Funds in March 2021 to track the performance of the CSI China Tech 50 Index. The ETF consists of stocks of technology companies listed on the A-share market in mainland China, aiming to provide investment opportunities in the technology industry of mainland China by tracking the index components. As of the end of September, the fund size was 652 million NTD.

Taiwan Investors Frenziedly Buy 00887, Premium Soared 223%

The Chinese government introduced a strong market support plan before the National Day holiday, triggering investors to rush into the artificial bull market in China. The Nasdaq Golden Dragon China Index (HXC), which represents Chinese concept stocks, surged by 23.94% in a week, leading to a fruitful week for all risk assets.

However, as the Chinese stock market was closed from 10/1 to 10/7, Taiwanese investors sought alternative options. With a large influx of funds into Yuanta China Tech 50 ETF 00887 but lacking liquidity, the ETF experienced a significant premium. On 10/7, the premium reached as high as 223%, where investors had to pay 38.83 NTD to buy while the net asset value of the ETF remained at 12 NTD, resulting in immediate losses for buyers.

Excessive Premium Leads to Special Inspection by FSC

According to a report by CNA, due to the substantial premium for consecutive days, 00887 was placed under the surveillance list by the GreTai Securities Market, revealing potential default delivery in the tens of millions. The Financial Supervisory Commission (FSC) also scheduled a meeting with Yuanta Funds on the 14th for discussion.

FSC Vice Chairman Chen Yen-liang mentioned during questioning by legislator Kuo Kuo-wen that 00887 is of small scale, making it a perfect small storm. The main reason for the situation was the market stimulation measures introduced by China during the extended holiday, where although Chinese markets were closed, Taiwan's stock market continued trading, leading investors to chase purchases. Chen stated that the FSC has initiated a special inspection, requested Yuanta Funds to provide explanations, implemented surveillance mechanisms, and Yuanta Funds has committed to promptly address the significant premium situation in the ETF.

A Replica of Grayscale's GBTC?

One significant feature of an ETF is that it allows Authorized Participants (AP) to conduct arbitrage by exchanging ETF shares with the fund company through its held net asset value (NAV) and the ETF, maintaining consistency between asset net value and market value.

APs can directly exchange ETF component stocks with the asset management company in the primary market, making the ETF closer to the spot market price through arbitrage. Before the issuance of the familiar Bitcoin spot ETF, Grayscale's GBTC experienced severe premium and discount issues due to the lack of this mechanism.

Due to its small scale and coinciding with the extended holiday, 00887 could not immediately trade in the Chinese stock market, resulting in significant market price fluctuations, eventually forming a "perfect small storm." However, for the small retail investors who bought in at that time, they ended up at the peak. This also serves as a reminder that investment should not blindly follow trends but requires thorough research and risk management to avoid being caught in a storm.