Overseas Funds Boost China ETFs to $10.58B in US
In late September, a flurry of favorable policies were密集ly introduced, leading to a significant surge in the A-share market and a substantial influx of overseas capital, resulting in substantial growth in the scale of some China stock ETFs. Subsequently, the market experienced a correction, prompting some hedge funds to adjust their positions, with actively managed funds taking advantage of recent market volatility to reshuffle their portfolios.
Growth in the Scale of China Stock ETFs
On September 24th, a regulatory body announced a comprehensive set of policies to stabilize the market and support economic growth. Following this, the largest China stock ETF listed in the United States—FXI—saw further growth in its scale. As of October 10th, FXI received net inflows of $6.151 billion, reaching a new scale of $10.58 billion. This marks the first time that the scale of a China stock ETF listed in the United States has exceeded $10 billion. In previous rounds of China stock bull markets in 2015, 2019, and 2020, China ETFs listed in the United States did not attract such a scale of capital inflows.
It is understood that FXI is issued by iShares, an ETF brand under the global asset management giant BlackRock, and tracks the FTSE China 50 Index, covering the 50 largest market value and most liquid stocks listed in the Hong Kong market.
Data shows that the top ten holdings of FXI currently 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.
During the National Day holiday, overseas capital actively scooped up shares. On October 9th, FXI received a net inflow of $1.6 billion, setting a record for the single-day net inflow amount.
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Why is FXI so favored by capital? The head of a U.S. ETF at a foreign institution said that the Chinese market has always been under-allocated by overseas investors. As the market began to rebound, increasing exposure to China through large-cap index funds like FXI is one of the most convenient ways. In addition to FXI, the China ETF KWEB also showed a similar trend. Data indicates that on October 1st, the fund received net inflows of $687 million, setting the highest single-day net inflow record since the establishment of the ETF; the latest scale of KWEB reached $7.42 billion.
As of October 10th, the five largest China stock ETFs listed in the United States, in addition to FXI tracking the FTSE China 50 Index, also include KWEB tracking the China Internet Index, MCHI tracking the MSCI China Index, ASHR tracking the CSI 300 Index, and YINN, which is a three times leveraged long position on the FTSE China 50 Index; the latest scales of these five ETFs are $10.58 billion, $7.42 billion, $6.25 billion, $2.96 billion, and $2.48 billion, respectively.
Active Management Giants Adjust Positions
Apart from passive ETFs, some active ETFs have also been actively seizing market rebound opportunities to adjust their positions and stocks. For example, the actively managed ETF under the trillion-dollar giant Capital Group has adjusted some of its holdings in Chinese stocks since October. The group's main product, CGGO, increased its holdings in Ctrip and NewOrient Energy, and moderately reduced its holdings in Tencent Holdings, Meituan, and Kweichow Moutai.Capital Group focuses on research into the Chinese market. At the end of August this year, the group dispatched a team to research Chinese companies and subsequently published opinions stating that investors need to pay attention to three aspects of the Chinese market: stocks with potential for valuation improvement; companies that focus on capital returns; and companies that are leading in the global electric vehicle sector.
In addition to bottom-up fundamental research, Capital Group also forecasts stock risk premiums and valuations based on factors such as regulations, geopolitics, and industry dynamics. The group stated that even considering the potential risks in the Chinese market, there are still investment-worthy targets in specific industries and companies, such as internet services, domestic leisure and tourism, electric vehicle supply chains, and industrial automation.
Capital Group added that in the foreseeable future, China will continue to be at the core of the global supply chain in many industries and will continue to conduct on-site inspections of related companies.
Sophie Earnshaw, manager of the Baillie Gifford China Growth Trust, a long-term overseas investment institution, recently stated that institutional investors are increasingly recognizing that ignoring the Chinese market will pose a significant risk to creating attractive returns for clients. She said that currently, some emerging markets, such as the Middle East, are becoming important sources of funds for the Chinese market. The investor base for Chinese stocks has undergone significant changes, and overseas funds will re-enter once the trend of China's economic recovery is established. Given that the Chinese market still has attractive valuations and continues to grow in operational fundamentals, the Baillie Gifford China Growth Trust has recently increased its holdings in some Chinese consumer brands.
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