Suzanne McGee
(Reuters) – Last week, with financial markets in mainland China closed for a national holiday, investors flooded U.S. ETFs targeting China markets with $5.2 billion in new assets.
The inflow of capital followed the announcement in late September of an initial package of stimulus measures from Beijing that included interest rate cuts and changes to bank liquidity requirements, culminating on September 30 with the biggest one-day rally that Chinese stocks have seen since 2008.
Tuesday is the first working day in China after a series of holidays last week, and senior officials from China’s top economic planning agency are expected to provide an update on steps to implement policies to promote economic growth.
China’s measures have generated some optimism that the support will sustain and prolong the dramatic shift in investor sentiment. The $5.2 billion inflow in the week ended Oct. 4 compares with an average weekly outflow of $83 million to date in 2024 and an average weekly outflow of $27 million last year, according to Morningstar data.
“The market has been waiting for a credible commitment from China to get the economy moving again,” said Michael Reynolds, vice president of investment strategy at Glenmede Trust, a New York boutique wealth management firm. “Now we have to see the sequel.”
The authorities also announced plans to increase investment in domestic ETFs. The China Securities Regulatory Commission announced in late September plans to quickly approve new ETFs that will track China’s “star market” – a segment of the Shanghai Stock Exchange dedicated to technology companies – and direct more capital to ETFs based in mainland China, according to Financial Financial Times.
“China markets are very oversold,” said Jonathan Krane, founder and CEO of KraneShares. His company’s flagship ETF, KraneShares CSI China Internet, added $1.39 billion in new assets last week, putting it in negative year-to-date flows, according to Morningstar.
The $8.3 billion KraneShares ETF is just one of more than two dozen China-focused funds that have posted double-digit one-week returns, gaining between 10% and 28% and outperforming more than 3,000 other ETFs traded on the market American last week. according to the Paris-based analytics company TrackInsight.
Krane believes the sharp rise in share prices is just the beginning as investors have little exposure to Chinese stocks after February’s sharp decline in the benchmark CSI 300 index, itself a reaction to growing concerns about everything from a housing market collapse, weak economic data to deflation and geopolitical events.
“It’s only a very small percentage of the world that is coming back or saying I need to rethink China,” Krane added. “It was just early money.”
The vast majority of money last week flowed into the largest ETFs offering broad exposure to a range of large-cap Chinese stocks. BlackRock’s $7.99 billion iShares China Large-Cap ETF saw inflows of $2.7 billion last week, according to Morningstar.
“When you see moves this broad and wild, you first see money flowing into these (index-linked) products,” said Michael Barrer, head of ETF capital markets at asset manager Matthews Asia. Still, assets in the Matthews China Active ETF of $44.8 million rose after net inflows of $11.7 million last week.
For China-focused ETFs to retain new assets, Beijing will need to announce a package of detailed and effective reforms, said Jason Hsu, founder and CEO of Rayliant Global Advisors, an asset management firm.
“The next bazooka that Beijing fires must take the form of formalizing new stimulus proposals and adding a timetable,” he said.
Roundhill Investments CEO Dave Mazza said he sees a shift in investor sentiment.
Last week, Roundhill launched the Roundhill China Dragons ETF, focusing on nine of what Roundhill considers the largest and most innovative Chinese technology companies. Mazza said it attracted net inflows of $35 million in its first two trading days.
“We recognized that the situation would soon turn around and China would be able to invest again,” Mazza said.
(Reporting by Suzanne McGee; Editing by Megan Davies and Leslie Adler)
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