Smart Beta Could Be Smart Play on China Equity Rebound | ETF Trends

Chinese stocks are among the world’s more impressive performers this year — a scenario widely attributed to the world’s second-largest economy finally shedding harsh coronavirus restrictions. While a reopening in an economy the size and scope of China is a credible catalyst and relevant to market participants, it’s not a stretch to say that despite 2023 being barely more than two months old, reopening benefits are largely priced into Chinese stocks. That means that going forward, investors need to be selective in how they access this asset class.

Enter the KraneShares CICC China Leaders 100 Ind ETF (KFYP). KFYP follows the CSI CICC Select 100 Index, employing a smart beta approach to China International Capital Corporation (CICC)’s current research on 100 marquee companies listed in mainland China.

Currently, the KraneShares ETF holds 95 stocks, and while the fund isn’t heavily allocated to growth stocks, it has more than adequate positioning with which to capitalize on waning regulatory intensity in China. Recently, state-run media there are posting fewer articles and videos related to government regulatory scrutiny, indicating a potentially more sanguine operating environment for KFYP member firms across a variety of sectors.

“We view the decrease in regulatory scrutiny as a positive for domestic business growth—particularly for industries who have been the most affected by regulations including technology, real estate, and education. While companies may not be subject to the same regulatory intensity that we saw in recent years, existing policy priorities imply that the risks of government involvement with the private sector are likely to remain elevated,” observed BlackRock.

Another possible catalyst for KFYP this year is the potential for a thaw in US/China geopolitical relations. To say the current state of affairs is “frosty” is an understatement, but that also implies ample room for improvement. Should some improvement materialize, Chinese equities could benefit.

“As China looks to foreign trade as another channel to foster growth, policymakers appear to be placing greater emphasis on improving relationships with the US and other global leaders. However, the trend towards deglobalization and structural tensions between China and the US present ongoing risks that we continue to monitor,” added BlackRock.

Data indicate foreign investors are already wagering on that improvement coming to fruition as the current quarter is on pace to be one of the best on record in terms of foreign investors directing capital to Chinese financial markets.

“China’s renewed focus on growth means that policy and regulatory restrictions may be less constraining going forward. We see a few key opportunities arising from this shift for investors who seek exposure to China,” concluded BlackRock.

For more news, information, and analysis, visit the China Insights Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.