Industry Updates

Investors bullish on China equity ETFs as 'worst-is-over' narrative takes hold

CSI 300 index is up 7.9% over the past month as the S&P 500 enters a bear market

Theo Andrew

Chinese dragon China

Investors turned bullish on China last week piling over $470m into ETFs tracking the market on signs Asia's largest economy has reached an inflection point on several key issues.

Despite China’s zero-COVID-19 policy remaining firmly in place, lockdowns across the country have started to ease while the government continues to implement growth support measures at a time when western central banks are tightening monetary policy.

Furthermore, some believe the regulatory treatment of technology could also be turning less hostile following reports Chinese authorities are ending their probe into transport company Didi.

Chinese equities have rallied to their highest point since early March as investors target a growth opportunity at a time when global markets deteriorate.

The CSI 300 is 7.9% up over the past month while the S&P 500 entered a bear market earlier this week and is 10.3% down over the same period as the Federal Reserve hiked rates by a further 75-basis-points last Wednesday.

ETF investors have been quick to capitalise in a bid to offset their US equity pain.

The iShares MSCI China A UCITS ETF (CNYA) took in most of the flows, raking in $293m in the seven days to 17 June, while the iShares MSCI China UCITS ETF (ICHN) recorded inflows of $102m over the same period, according to data from Ultumus.

Elsewhere, the KraneShares CSI China Internet UCITS ETF (KWEB) saw $44m inflows last week.

The HSBC MSCI China UCITS ETF (HMCH) and the Lyxor MSCI China UCITS ETF (LCCN) also saw inflows of $13m and $8m, respectively.

In a research note, JP Morgan said China’s positive momentum should be a driver for broader emerging markets.

“China's macro-outlook should positively desynchronise from the global economy into H2 2022,” it said. “There is also some positive de-risking optionality as firstly, US President Joe Biden commented on potential Chinese tariff reductions to help control rising US consumer prices and, secondly, peaking uncertainty from regulatory, de-listing and geopolitical risks for China internet.”

Despite this, recent days have shown China tailwinds may not be a straightforward bet. The country is sticking to its zero-COVID-19 policy and some areas have faced fresh lockdowns sparking concerns of new supply chain issues.

Helen Qiao, China and Asia economist at Bank of America, said: “Recent lockdowns in major cities in China have fuelled concerns about exacerbating global supply chain woes and stoking inflation. Despite the strong rebound in May export growth, we do not think such risks have dissipated.

“Since there is no sign of exit from the zero-COVID-19 strategy, lingering control measures in China will probably continue to weigh on its industrial activities in the near term.”

China bonds continue to suffer

While investor sentiment looks to have reached a turning point for Chinese equities, the bond market continues to suffer as surging US yields continue to eat into the advantage previously felt by Sino bonds.

Highlighting this, the iShares China CNY Bond UCITS ETF (CNYB) has continued to haemorrhage assets throughout 2022. The ETF recorded a further $423m of outflows last week and has now lost over half of its assets over the past five months, shrinking from $13.6bn in January to $6.2bn, as at 17 June.

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