Despite concerns about Chinese government interventions, which have shattered several stocks and sectors this year, investors are pouring money into exchange-traded funds devoted to Chinese equities.
Since February, the market value of Chinese equities has dropped by more than $1tn as a series of regulatory blows have targeted sectors such as video games and technology, property, and education.
According to ETFGI, a London-based consultancy, three China-focused ETFs – ChinaAMC MSCI China A 50 Connect, E Fund MSCI China A 50 Connect ETF, and China Universal MSCI China A 50 Connect ETF – were among the top 15 globally for net inflows in November.
According to Goldman Sachs, KraneShares CSI China Internet ETF (KWEB) has taken in $7.8 billion of net flows since mid-February, which is almost twice as much as any other US-listed thematic ETF.
Those who took the plunge into China are now looking at opportunities in the battered Chinese equities market, which has fallen by a third from its February peak in dollar terms.
“Chinese equities are not as strong as they were at the start of this year,” says Karim Chedid of iShares Europe.
“Chinese equities are still under-represented in global indices, and the trend is set to continue upward. Now could be an excellent time to invest on a long-term basis,” he continued.
“The long-term outlook appears favourable for investors,” said Morningstar’s associate director of passive strategies research, Jorge Garcia-Zarate. “China’s economic development is recovering much more quickly than other countries’ growth rates indicate. That helps to explain the demand for equities.”
According to the latest data, home price appreciation and mortgage refinancing volume have tapered off. “Growth while slowing is still somewhat stronger than in developed nations,” said Matt Bartolini, head of SPDR Americas research at State Street Global Advisors. He added that investors might have been purchasing on the cheap since the beginning.
Even though Chinese technology companies have endured a year of regulatory conflict after Ant Group’s $37 billion initial public offerings were cancelled in November 2020, KraneShares ETFs have been tremendously successful at raising capital.
KWEB’s stock tumbled 46% thus far in 2018 because its assets, including Tencent, Alibaba, JD.com, Baidu and Pinduoduo, are still vital to consumer spending in China’s second-largest economy.
“You could make a case that about a third of all retail sales in China go to companies situated in KWEB,” KraneShares’ Brendan Ahern added.
“Equity investors recognize that China is becoming an asset class in its own right,” he added, referring to parallels with Japan’s bifurcation in the 1980s and 1990s, which many investors saw as a departure from the larger Asia-Pacific region.
The appetite for Chinese equities has been reflected in demand for the country’s bond ETFs: the $12.1bn iShares China CNY Bond Ucits ETF (CNYB) has Europe’s second-largest fixed-income ETF just two years after its launch, according to demand data.
The fortunes of China-focused ETFs contrast with those of the bigger emerging market world. In recent months, money has been flowing into broad global emerging market equity ETFs slower, with funds from other regions or single countries taking centre stage.
“Emerging markets are experiencing more long-lasting damage as a result of the Covid-19-related activity decline and recession,” added Chedid. “They aren’t returning in the same way as developed markets. As a whole, it appears to be more difficult, so ETF investors are going deeper.”
According to Alexander Elder, Brazil has been an underperformer, with the MSCI Brazil index down 21.6 percent year-to-date in dollar terms, so some speculators may be betting on it bottoming out.
While one might think that Italian equities would maintain a positive tone, according to Bartolini’s data, single-country EM equity portfolios had net outflows of almost $2 billion in 2018, aside from the $13 billion inflow into Chinese funds.
Instead, he observed indications of sectoral allocation, with $77 billion invested in largely cyclical sectors such as financials, energy, and real estate this year — a trend that is now reversing with defensive industries like healthcare and consumer staples coming back in vogue as investors finally price in expectations of a developed world monetary tightening.