The KraneShares CSI China Internet ETF (KWEB) experienced a large price decline in 2021 but record inflows as investors seized the opportunity to gain exposure to China’s technology giants and the growth potential they have at value prices. This year has seen KWEB hit hard once more as investor uncertainty broadly combined with delisting fears for Chinese companies on U.S. markets have caused further volatility for the fund. KraneShares addressed the price action and volatility of KWEB and the outlook and any concerns both current and forward-looking in a webinar.
Drivers of the price drop-off for KWEB included forced sellers, delisting concerns for Chinese companies surrounding the Holding Foreign Companies Accountable Act (HFCAA), the Russia/Ukraine conflict impacting markets broadly, China’s macro outlook and the regulatory environment, as well as the overall U.S. macro outlook.
James Maund, head of capital markets at KraneShares, explained that KWEB has been converting from ADRs into Hong Kong shares for the last year and will continue that process as KraneShares foresees all Chinese companies being delisted ultimately.
The issue is one of opposing regulations that prevent Chinese companies from disclosing audit papers to the U.S. on one side and U.S. regulations demanding access to those audit papers to be included in U.S. markets on the other. Currently, 90% of the portfolio for KWEB has clarity on if and when companies will be relisted in Hong Kong if they are not currently listed there.
“We do expect that more of the names that we currently hold as U.S. ADR listings will be relisting or dual-listing in Hong Kong within the coming months, certainly before year-end,” Maund says.
Risks and Growth for China
Dr. Xiaolin Chen, head of international at KraneShares, discussed the geopolitical risks for China, which included limited impacts to Chinese CPI from increasing commodity prices such as wheat, a reduced volatility outlook compared to the rest of the world, less impact to trade disruptions with Russia, and China’s state-backed banks suspension of Russian activity.
“China has a very idiosyncratic nature in policymaking, which is highly domestic-oriented, indicating that policymakers have plenty of room to act,” Dr. Chen explained. That, coupled with the high degree of focus domestically by Chinese companies, means that outside influences and factors are minimal.
The biggest impact that geopolitical tensions would have for China-related to Russia would be through trade, Dr. Chen believes, but even if a disruption were to happen, its ultimate impacts would be minimal to China’s economy and inflation. As the world’s top trading partner, sanctions against China or freezing trade from China could very well send the world into a global depression, something that China and the world are eager to avoid.
China is currently in the process of easing its monetary policy as its inflation begins to subside, compared to the majority of the world, which is tightening. The forecasted GDP growth for China is 5.5% for 2022 to keep inflation near 3%. Stability is a primary focus of China’s policy forecast for this year, emphasizing job growth.
Pivoting to discuss the individual holdings in KWEB, Ahern explained that there is an underlying disconnect between the underlying fundamentals of companies and investor sentiment and fears.
“The key thing to recognize is that these sellers in the underlying securities are driven by a rationale very, very disparate from the fundamentals of the companies. We’ve got this incredible disparity between the fundamentals of the companies and the price action, and I think we’ve seen that over the last year,” Ahern said.
Ahern also touched on the meeting yesterday in China, where Vice Premier Liu He said that Chinese and U.S. regulators were making headway regarding the delistings and solving the current issues. The meeting also pressured Chinese agencies to be more transparent regarding regulations and a call to bring those regulations to a conclusion soon.
“The growth rate of these companies continues to improve; the price action disagrees with that statement, but the end reality that the core thesis of why we listed KWEB back in August of 2013 here in the U.S. and subsequently in Europe is because we believe the e-commerce companies are the transmission engines for domestic consumption in China,” Ahern explained.
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