Analysis-US-based China ETFs get bumper influx, some investors optimistic tide is turning

By Suzanne McGee

(Reuters) - Investors flooded U.S.-based exchange-traded funds (ETFs) that target Chinese markets with $5.2 billion in new assets in the past week when mainland China's financial markets were shut for a national holiday, and some asset managers are hopeful the optimism will be enduring.

The influx came after an initial package of stimulus measures from Beijing that included interest rate cuts and changes to bank liquidity requirements was announced in late September, which culminated on Sept. 30 in the largest one-day rally that Chinese stocks have seen since 2008.

Tuesday is the first working day in China after a run of holidays over the past week, and senior officials from China's top economic planning agency are expected to give information on steps to implement policies to promote economic growth.

China's measures have driven some optimism that the support will sustain and extend the dramatic turnaround in investor sentiment. The $5.2 billion inflow for the week ended Oct. 4 compares to an average weekly outflow of $83 million to date in 2024, and an average weekly outflow of $27 million last year, according to data from Morningstar.

"The market has been waiting for a credible commitment from China to get its economy going again," said Michael Reynolds, vice president of investment strategy at Glenmede Trust, a New York-based boutique wealth management firm. "Now we need to see follow-through."

Authorities also have announced plans to boost their investment in domestic ETFs. China's Securities Regulatory Commission announced plans in late September to rapidly approve new ETFs that would 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 the Financial Times.

"The China markets have been so oversold," said Jonathan Krane, founder and CEO of KraneShares. His firm's flagship ETF, KraneShares CSI China Internet, pulled in $1.39 billion in new assets last week alone, putting year-to-date flows back in the black, according to Morningstar.

The $8.3 billion KraneShares ETF is just one of more than two dozen China-focused funds that posted double-digit one-week returns, gaining between 10% and 28% and outperforming the more than 3,000 other ETFs traded in the U.S. market last week, according to Paris-based data analytics firm TrackInsight.

Krane believes the surge in share prices is just the start, as investors have low exposure to Chinese stocks after February's outsize nosedive by the benchmark CSI 300 Index, itself a reaction to growing fears about everything from a real estate slump, lackluster economic data, deflation and geopolitical events.

"This is just a very small percentage of the world getting back in or saying I need to rethink China," Krane added. "This was just the early money."

The vast majority of money in the past week has flowed into the biggest ETFs that offer broad exposure to a range of large-cap Chinese stocks. BlackRock (NYSE:BLK )'s $7.99 billion iShares China Large-Cap ETF saw inflows of $2.7 billion last week, according to Morningstar.

"When you see moves that are so vast and violent, you see money flow into these (index-linked) products first," said Michael Barrer, head of ETF capital markets for asset management firm Matthews Asia. Still, assets in the $44.8 million Matthews China Active ETF have soared in the wake of net inflows of $11.7 million last week.

For Chinese-focused ETFs to hang on to the new assets, Beijing will need to announce a package of detailed and high-impact reforms, said Jason Hsu, founder and CEO of Rayliant Global Advisors, an asset management firm.

"The next bazooka that Beijing fires has to come in the shape of formalizing new stimulus proposals and adding a timeline," he said.

Roundhill Investments CEO Dave Mazza said he saw the tide turning in investor sentiment.



Roundhill launched Roundhill China Dragons ETF last week, focusing on nine of what Roundhill deems the largest, most innovative Chinese technology firms. It attracted net inflows of $35 million in its first two trading days, Mazza said.

"We figured that at some point soon, the tide would turn and China once again would be investable," Mazza said.

Source: Investing.com