Time for China ETFs to ‘leap’ in Year of the Rabbit?

Chinese securities have performed well so far this year

Tom Eckett

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China ETFs look set to continue their impressive start to 2023 in the Year of the Rabbit as the government shifts away from its ‘zero COVID-19’ stance, a policy that has weighed on performance over the past year.

As the country starts to re-open, China ETFs are among the best performing strategies so far this year. The Lyxor MSCI China UCITS ETF (LCCN) is up 14% versus 2.5% for the iShares Core S&P 500 UCITS ETF (CSPX), as at 20 January.

Meanwhile, tech ETFs such as the KraneShares CSI China Internet UCITS ETF (KWEB) and the UBS ETF Solactive China Technology UCITS ETF (CHTE) have returned 14.5% and 16.8% over the same period, respectively.

Demand for China ETFs has also been strong with the iShares MSCI China A UCITS ETF (CNYA) seeing $589m inflows, the most across all China UCITS ETFs, while investors have piled a combined $559m into the iShares MSCI China UCITS ETF (ICHN) and the Xtrackers MSCI China UCITS ETF (XCS6).

Signs are promising for investors brave enough to take on direct exposure to China. The consumer, in particular, is set to play a vital role in the recovery this year.

According to data from Franklin Templeton, there is an estimated RMB6.6trn in excess savings that have been built up during Beijing’s three-year policy of zero-COVID-19.

While infection rates are set to increase during the reopening, this presents an exciting opportunity for investors as consumer demand surges.

As KraneShares said: “China may leap back to growth in the Year of the Rabbit after a challenging 2022, but its growth largely hinges on one variable: the consumer.

“We believe any recovery in China will have to be led by a completed reopening process and a stabilised real estate market so consumer sentiments can bounce from a multi-year low.”

The ETF issuer’s views were echoed by Victoria Scholar, head of investment at interactive investor, who pointed to a balance between reopening and the spike in coronavirus cases.

“On the one hand, its hotly-anticipated economic reopening with the long overdue dismantling of Beijing’s zero-tolerance to COVID-19 lockdown measures could finally release a surge of pent-up demand.,” Scholar continued.

“On the other hand, the world’s second-largest economy is grappling with a spike in infections, which is likely to test the resolve of the Chinese authorities to stick to their reopening trajectory.”

However, frosty relations between Washing and Beijing still weigh on investor sentiment with President Joe Biden yet to reverse any of the tariffs placed on Chinese goods by Donald Trump.

Taiwan remains a constant issue as well as the delisting of Chinese stocks on US exchanges, however, there are signs of change following Biden’s meeting with leader Xi Jinping last November.

“An improvement in US-China relations will require enhanced pragmatism from both sides,” KraneShares continued. “We believe that ultimately economics will prevail over fearmongering and politics.”

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