Billions in Hot Money Flood US-listed Chinese ETFs, Optimism Expected to Continue

2024-06-29 158 Comments

Over the past week, as China's mainland financial markets were closed for the National Day holiday, investors poured $5.2 billion (approximately 36 billion yuan) in new assets into US exchange-traded funds (ETFs) targeting the Chinese market, with some asset management companies hoping this optimism will continue.

At the end of September, the Chinese government announced a package of stimulus measures, which subsequently propelled the Chinese stock market to its largest single-day gain since 2008 on September 30th. Tuesday marked the first working day after a week of consecutive holidays in mainland China, and the market continued its upward trend, with the Shanghai Composite Index closing up 4.59% and the ChiNext Index rising by over 17%. The turnover on the Shanghai and Shenzhen markets exceeded 3.4 trillion yuan, setting a historical record.

The Chinese government's measures have led some to be optimistic that this support will sustain and extend the shift in investor sentiment. Data from Morningstar shows that $5.2 billion flowed in during the week ending October 4th, compared to an average weekly outflow of $83 million so far in 2024 and an average weekly outflow of $27 million last year.

Michael Reynolds, Vice President of Investment Strategy at New York-based boutique wealth management firm Glenmede Trust, said: "The market has been waiting for China to make a credible commitment to get its economy going again. Now we need to see follow-up actions."

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Authorities also announced plans to increase investment in domestic ETFs. It was reported that the China Securities Regulatory Commission (CSRC) announced at the end of September plans to quickly approve new ETFs that will track China's "Star Market," directing more funds towards ETFs located in mainland China. The Star Market is a section of the Shanghai Stock Exchange specifically designed for technology companies to go public.

Jonathan Krane, founder and CEO of KraneShares, said: "Chinese stocks have been oversold." According to Morningstar data, his flagship ETF, KraneShares CSI China Internet, attracted $1.39 billion in new assets last week alone, turning the year-to-date fund flow into an inflow.

Data from TrackInsight, a Paris-based data analytics firm, shows that more than twenty China-focused ETFs achieved double-digit returns within a week, with gains ranging from 10% to 28%, outperforming over 3,000 ETFs traded in the US market last week, with the $8.3 billion KraneShares ETF being just one of them.

Krane believes that the stock price surge is just the beginning, as investors have a lower exposure to Chinese stocks following the sharp drop in the CSI 300 Index in February. Krane added: "This is just a very small part of the world returning to the Chinese market, or saying I need to reconsider China, this is just the early money."

Over the past week, the vast majority of funds flowed into the largest ETFs, which provide broad exposure to a range of large-cap Chinese stocks. Morningstar data shows that the iShares China Large-Cap ETF saw an inflow of $2.7 billion last week.

Michael Barrer, Head of ETF Capital Markets at Matthews Asia, an asset management firm, said: "When market volatility is so high, money will first flow into these (index-linked) products." Nevertheless, after a net inflow of $11.7 million last week, the assets of the $44.8 million Matthews China Active ETF surged significantly.Jason Hsu, founder and CEO of asset management firm Rayliant Global Advisors, noted that for China-focused ETFs to continue holding these new assets, the Chinese government will need to announce a series of detailed and far-reaching reform measures. He stated: "The next wave of the Chinese government's offensive must be to formally establish new stimulus plans and add a timetable."

Dave Mazza, CEO of Roundhill Investments, pointed out that he has seen a shift in investor sentiment. Roundhill launched the Roundhill China Dragons ETF last week, focusing on what Roundhill considers the nine largest and most innovative Chinese technology companies. Mazza said it attracted $35 million in net inflows in the first two trading days. Mazza said: "We believe that at some point in the near future, the tide will turn, and China will once again become an investable proposition."

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