Foreign Capital Flows into Chinese Assets via ETFs

Last week, some hedge funds began to adjust their strategic layout. However, passive funds continued to flow into Chinese assets. As of now, the largest China stock ETF listed in the United States has surpassed $10 billion, reaching $10.58 billion. This is the first time that a China stock ETF listed in the United States has broken through the $10 billion mark. In the bull markets of Chinese stocks in 2015, 2019, and 2020, there was no single China ETF listed in the United States that exceeded $10 billion in scale. Recently, the Chinese market has bottomed out and rebounded, with a surge of funds flowing in, leading to significant growth in the scale of some Chinese stock ETFs.

Since the press conference on September 24, FXI has seen net inflows of $4.35 billion.

On September 24, a set of policies were announced by one bank, one bureau, and one meeting to stabilize the market and support economic growth. Since then, the scale of FXI has taken off. From September 23 to October 10, FXI received net purchases of $6.151 billion. As of October 10, the scale of FXI was $10.58 billion. FXI is issued by iShares, the ETF brand of the global asset management giant BlackRock, tracking the FTSE China 50 Index, covering the 50 largest market value and most liquid stocks listed in the Hong Kong market.

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The top ten holdings of FXI include Meituan, Alibaba, Tencent Holdings, JD.com, China Construction Bank, Xiaomi Group, Ping An Insurance, BYD, Bank of China, and Industrial and Commercial Bank of China, among others.

On October 9 alone, FXI received a net inflow of $1.6 billion, setting a record for the largest single-day net inflow. Why are funds pouring into FXI? The head of a U.S. ETF at a foreign institution said that the Chinese market has always been underweighted by overseas investors. Rebound in the market, increasing exposure to China through large-cap indices like FXI is one of the most convenient ways. In addition to FXI, the popular Chinese ETF KWEB shows a similar trend. On October 1, it received net purchases of $687 million, setting the largest single-day net purchase record since the ETF was established. The latest scale of this ETF has reached $7.42 billion.

As of October 10, 2024, the largest China stock ETFs listed in the United States include FXI - tracking the FTSE China 50 Index, KWEB - tracking the China Internet Index, MCHI - tracking the MSCI China Index, ASHR - tracking the CSI 300 Index, and YINN - three times long on the FTSE China 50 Index. The scales of these five ETFs are $10.58 billion, $7.42 billion, $6.25 billion, $2.96 billion, and $2.48 billion, respectively.

China Drives Emerging Market Index

Goldman Sachs pointed out in a report on October 9 that China's policy measures have supported emerging markets, bringing a broad rebound in emerging market stocks. Until this summer, the broad emerging market stock index had been under long-term pressure.

As the Federal Reserve entered a loose cycle, the global macro environment improved. Chinese policymakers recently announced stimulus measures coordinated by multiple ministries and commissions, and emerging market stocks have seen a major rebound. The MSCI Emerging Markets Index has risen by 11% from its low point in mid-September, and has risen by 15% year-to-date. The recent rebound has been driven by Chinese stocks, which have risen by nearly 40% from their low point. In the past three weeks, China's performance relative to other emerging markets has been better than any period in the past 25 years.

In the past two weeks, China has driven the rise of the emerging market index. If you compare the MSCI Emerging Markets Index with the MSCI Emerging Markets Index (excluding China), you will find that the performance gap between the two has widened after September 23. Since September 23, EEM, which tracks the MSCI Emerging Markets Index, has significantly outperformed EMXC, which tracks the MSCI Emerging Markets Index (excluding China).Asian hedge funds have also benefited from the strong performance of the Chinese market. For instance, as of the end of September, the flagship fund of the renowned Asian hedge fund Dymon Asia has surpassed $3 billion in size.

Goldman Sachs anticipates further gains in emerging market equities. The firm's Asia equity strategists have upgraded their rating on the Chinese market to overweight. The investment bank has analyzed the potential spillover effects of a recovery in Chinese growth from three dimensions: economy, fundamentals, and stock prices. Goldman Sachs stated that countries like South Korea, Malaysia, South Africa, and commodity markets (Peru, Chile) show high sensitivity to Chinese growth and may directly benefit from China's recovery.

A substantial amount of capital is waiting to enter the market. For example, a significant influx of new funds (retail investors who have just opened accounts, newly launched funds, foreign capital that previously held a low position in Chinese stocks, and medium to long-term funds on standby) is about to enter the market. Should the A-share market experience a correction, the new funds that missed the previous rebound may seize the opportunity to enter or increase their positions.

In the medium term, a sustainable market rebound requires support from corporate earnings. UBS stated that, overall, A-share earnings are expected to decline by 3% in the first half of 2024, while industrial profits rose by 4.1% year-on-year in July and then turned negative in August. If earnings gradually improve alongside fundamental growth, there is expected to be room for further increases in the A-share market.

Who is driving the recent rise? UBS indicated that the market may be driven by four types of investors. First, retail investors are estimated to account for about 60% of A-share trading volume. The recent significant increase in A-share market volume suggests that retail investors are eager to participate as market sentiment warms. Second are public mutual funds. In the last week of September, the scale of newly issued equity funds increased nearly ninefold to 20.1 billion yuan compared to the previous week, reaching the highest weekly level in nearly two years, indicating that public mutual funds now have more investable funds. Third, some insurance funds may have played a role in the recent rebound. Fourth, northbound capital saw a net outflow of 74.6 billion yuan from mid-June to mid-August. Foreign investors may have increased some positions after the A-share rebound.

The founder of a Singapore-based asset management firm stated that this bull market will not come to an abrupt end, as policies continue to introduce measures to stabilize the economy, and incremental funds are anticipated. In the medium to long term, the outlook for the A-share market is positive.