US-listed China ETF investors ignore pledge to boost the economy

When China’s leaders last week signalled that Beijing would introduce measures to support the economy as it makes a “tortuous” recovery from the pandemic, US-listed China exchange traded fund investors barely reacted.

Data provided by VettaFi shows that in the week following the politburo meeting only the KraneShares CSI China Internet ETF (KWEB) attracted significant inflows, of $136.1mn.

The ETF that ranked second in terms of inflows, attracting $22.3mn, was the Direxion Daily FTSE China Bear 3x Shares (YANG) ETF — which offers the opportunity to bet that China’s market will fall. Inverse ETFs allow investors to make money when markets decline but result in magnified losses if the market rises.

Most of the 57 China-focused US-listed ETFs in VettaFi’s database attracted no inflows at all and 12 actually experienced outflows — the worst affected being the iShares MSCI China ETF (MCHI), which had outflows of $47.6mn in the week to July 31.

 “It’s easy to go broke betting on China policy meetings providing huge and definitive catalysts for Chinese stocks,” said Philip Wool, managing director and head of research at Rayliant Global Advisors. Rayliant runs the Rayliant Quantamental China Equity ETF (RAYC), which provides overseas access to China-listed A-shares.

“Instead, I try to assess what the meeting says about how Beijing’s thinking is evolving,” said Wool. He said notes from the politburo meeting indicated that authorities recognised where the real problems were in terms of weak domestic demand, but he did not expect a huge stimulus such as Beijing injected during the global financial crisis.

“You’ve got a country with massive pent-up household savings and a clear desire to grow its middle class in the long run and build a system that relies more on domestic consumption than exports,” Wood added.

Brendan Ahern, chief investment officer at Krane Funds Advisors, said the positive messaging from the politburo meeting should have made investors realise it was time to increase their China weighting.

“Here is the key for investors: the release [of the politburo statement] is just the start,” Ahern said. “Think global investors are positioned for this? Me neither.”

The problem, according to Kevin Carter, founder and chief investment officer of EMQQ The Emerging Markets Internet & Ecommerce ETF, which has a 56 per cent exposure to China, is that a series of shocks last year, including the China tech crackdown, and the threat of delisting that loomed over US-listed Chinese entities, made many investors believe China was “uninvestable”.

But Carter’s belief in China and particularly China’s technology sector is undimmed. He believed the measures Beijing introduced to counter the rise of the tech giants were sensible.

“In terms of the internet and ecommerce, China is the most advanced country on the planet,” he said.