What Slowdown? These China-Focused ETFs Are Outpacing the S&P 500

What Slowdown? These China-Focused ETFs Are Outpacing the S&P 500

Key Takeaways

  • Investment managers are flooding back to Chinese exchange-traded funds (ETFs) in 2024, leading to them outperforming the S&P 500.
  • Regulatory action by China to stem short selling and increase state-backed share purchases stabilized the market after a $2 trillion sell-off from 2021.
  • Overseas investors have returned to reverse sharp outflows in late 2023, while Chinese domestic investors have pumped $28.5 billion into Hong Kong-listed stocks.

Shares in Chinese companies have seen a reversal in fortunes after a few rough years, and some China-focused exchange-traded funds (ETFs) are now outperforming the S&P 500 this year.

Boosted by market stimulus from the Chinese government, Chinese ETFs are seeing a sharp rebound in investment. Money manager investment in China was the highest among emerging-market countries for the week ended May 17 with inflows of $488 million, Bloomberg reported.

China-Focused ETFs Overtake S&P 500 Returns

The iShares China Large-Cap ETF (FXI), with roughly $5.2 billion in assets, is leading the charge—posting a near 22% year-to-date return, compared with 11.5% for the S&P 500 as of late Tuesday. The ETF tracks the FTSE China 50 Index, giving investors exposure to the 50 largest companies trading on the Hong Kong Stock Exchange.

Close behind is the $5.9 billion iShares MSCI China ETF (MCHI) with a 13.6% return.

The largest China-centric, albeit a more niche ETF, is the $6.5 billion KraneShares CSI China Internet ETF (KWEB) that has gained about 20% year-to-date.

Interestingly, Tencent Holding (TCEHY) and Alibaba Group (BABA) feature among the top three holdings of all three of these ETFs.

Diversification can be found in the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which tracks the broader market, but this ETF is trailing the large caps with a 7% return so far in 2024.

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Investors Worldwide Return to Chinese Equities

Amid concerns of an economic slowdown, accumulated outflows from Chinese equities since August 2023 peaked at 218 billion yuan ($30.2 billion) in January of this year, according to a separate Bloomberg data analysis. But that trend began to reverse in February after the Chinese authorities announced measures to stabilize markets, pulling them away from multiyear lows.

The measures included restrictions on securities lending and short selling, and state investment funds also vowed to step up purchases to reverse a loss of $2 trillion in market cap from 2021 highs. These steps seem to be working, as the total outflows had narrowed to about 100 billion yuan by early May. Chinese investors also have been very active in Hong Kong-listed stocks, with total inflows reaching HK$223 billion ($28.5 billion) this year.

Some prominent investors also bet big on Chinese stocks traded in the U.S. in the first quarter, data from their recent 13-F filings show. David Tepper’s Appaloosa Management more than doubled the number of Alibaba shares in its portfolio, and did the same with Baidu (BIDU), adding 1.17 million shares, and with PDD Holdings (PDD), buying 1.32 million more of that company’s shares. Tepper also entered a new 3.6 million-share-position in Chinese e-commerce company JD.com (JD).

“Big Short” Michael Burry‘s Scion Asset Management added to his JD.com and Alibaba holdings and opened a new position in Baidu.

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