The rally in China exchange traded funds is, finally, starting to receive more attention and deservedly so after five China ETFs hit new 52-week highs on Monday.
None of the China ETFs making new highs Monday were A-shares funds, but that does not mean the stocks traded in Shanghai and Shenzhen are lagging. The Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK) was Monday’s top-performing non-leveraged ETF with a gain of 3.7% on volume that was better than six times the daily average.
The db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), the largest A-shares ETF, gained almost 3%, also on volume that was better than six times the daily average. TheKraneShares Bosera MSCI China ETF (NYSEArca: KBA) got in on the fun as well with a 2.6% pop. Those performance cement the notion that China ETFs and stocks on the mainland and Hong Kong are trying to break some critical multi-year resistance. [China ETFs are Perking Up]
“Last week, we highlighted how China’s A-share market was on the verge of a technical break out. Since then, the Shanghai index (SHCOMP) has staged that break-out,” said Robbert van Batenburg, director of market strategy at Newedge Group, in a statement released Monday.
Amid talk of declining property values, which have served to cool bubble speculation, and steadying economic growth, ASHR and KBA have surged 9% and 8.2%, respectively, since the start of this month. A-shares ETFs are also benefiting as more global investors realize the Chinese banking system may be stronger than it is given credit for.
“Chinese banks are highly regulated from the People’s Bank of China (PBOC). Additionally in order to expand beyond China, the Chinese banks need to raise their transparency, risk controls and adhere to international banking standards,” according to a recent note from KraneShares.
While non-performing loans have risen slightly, the “PBOC response has been to raise the quality of loans issued by the banks. There has been much attention to China’s loan to GDP ratio which has risen above 100% of GDP. This rate is low versus other Asian countries and far less than the levels preceding the Asian financial crisis in the late 1990s. The banks have responded to rising NPL levels by becoming more conservative in their lending activity,” said KraneShares.
A more sanguine view of Chinese banks is important because KBA and ASHR allocate 32.5% and 41.7% of their respective weights to the financial services sector.
Compelling valuations are also luring investors to A-shares ETFs. The CSI 300 Index, which tracks stocks listed on the Shanghai and Shenzhen exchanges, trades at a price-to-earnings ratio of less than 10, the lowest in over a decade, while Chinese shares listed on the Hong Kong exchanges trade at over 12 times earnings. A-shares are trading at their largest discount to H-shares in five-years. [A-Shares ETFs are Value Plays]
“China is among the cheapest stock markets in the world and while valuation alone is rarely a driver for a rally, there are several catalysts that currently support the rebound in Chinese stocks,” noted van Batenburg.
db X-trackers Harvest CSI 300 China A-Shares Fund
