China’s Strong, Silent Bull Cycle: Driving Renewed Interest?

Global equity ETFs have seen a steady drumbeat of inflows all year long, but one major player has been left out of the party. China has climbed a great wall of worry for years – with a property debt crisis, a disastrous equity slump, and a slow exit from COVID-19 restrictions. Investors have also lost confidence amid mounting U.S.-China geopolitical friction. This led to heavy total losses and outflows from Chinese ETFs right out of the gate this year.

After a multi-year decline, valuations have sunken to depressed levels, and investor exposure has plummeted as a result. Plenty of ex-China ETFs, like the Columbia EM Core ex-China ETF (XCEM) and the iShares MSCI Emerging Markets ex-China ETF (EMXC), have gained popularity instead.

Time to Rethink Exposure?

But Chinese stocks are quietly rallying back to the brink of a bull market. The Hang Seng Index rebounded in April, snagging a spot among the top global gainers last month. In fact, Hong Kong stocks are now up nearly 30% from January lows. Additionally, they have reached overbought levels. This occurs whenever an individual stock or index tops 70 on the Relative Strength Index (RSI).

Many China-based equity ETFs have rebounded in kind. The top 10 best-performing international equity ETFs over the last month (excluding leveraged and inverse products) have all been China-based, led by the iShares China Large-Cap ETF (FXI) and the KraneShares Hang Seng TECH ETF (KTEC) – with total returns up 13% and 12%, respectively.

Stimulative fiscal and monetary policies – along with high hopes for a gradual economic recovery – have fueled the recent rally. The country has also adopted somewhat friendlier regulatory and business policies – including pledging public support for its stock market and taking steps to improve market access to A-shares among foreign investors – and overhauled its corporate governance regime in a major way.

Still Shying Away from China?

Roughly half of all China-based ETFs have suffered outflows so far. But over the past month, the bleeding has slowed. Several China-based equity ETFs have even enjoyed a slight uptick over the last few weeks. However, flows are still on the sluggish side.

Investors who are easing into the idea of re-engaging with China’s equity markets are doing so through broad-based onshore Chinese equities tied to domestic consumption rather than large-cap or technology exposure. These tend to fall prey to policy changes and political mood swings.

So far in May, the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) has topped the flow charts – bringing in nearly $200 million in new money (the bulk of monthly inflows). The iShares MSCI China A ETF (CNYA) saw net inflows of $95 million last month, with net inflows now turning positive for the year.

Domestic consumption is certainly alive and well – with no shortage of revenge spending across restaurants, travel, and leisure. Many of these ETFs offer exposure to popular consumer names. These names include Kwaichow Moutai (distiller of China’s “national liquor”), electrical appliance maker Midea Group, and EV automaker BYD.

How KLIP & KWEB Apply

The KraneShares China Internet and Covered Call Strategy ETF (KLIP), which applies options overlays to the widely held KraneShares CSI China Internet ETF (KWEB), has also seen modest inflows since the start of April. KLIP has the potential to provide investors with attractive yields, with the caveat of capped potential price gains in KWEB.

Even KWEB itself, which offers pure-play exposure to software and tech titans like Alibaba, Tencent, and, has turned a modest corner this month – with roughly $55 million in net inflows so far.

It’s certainly still too early to call any significant shift in sentiment. But with capital markets allocations to China sitting at multi-decade lows, investors may be starting to dip their toes back into the world’s second-largest economy.

However, investors are apt to remain cautious in the near future, given potential headline risks stemming from the impending presidential election and other persistent issues that have previously dampened investor confidence.

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