Capital gains tax provisions on QFII stalk China A-share ETFs

Fund managers active in offshore-listed China A-share ETFs say a 10% provision set aside for capital gains tax on A-share trading related to P-note issues is increasing tracking error for some funds. Meanwhile, others are ignoring the tax risk altogether, which could significantly weigh on future performance.

Fund managers active in China A-share exchange traded funds (ETFs) say part of the reason for their underperformance versus the underlying index tracked by the fund is linked to a 10% provision they are making for a prospective capital gains tax by Chinese tax authorities. Such a levy, however, has not been enforced in China, despite talk of its introduction surfacing in the markets since around 2008.

Fears about the introduction of a new capital gains withholding tax on qualified foreign