Western investors flock to China equity ETFs

Western investors pumped a record amount into Chinese equity exchange traded funds in June as the mainland stock market surged ahead of its major rivals.

The flood of cash into the Shanghai and Shenzhen bourses came as the country’s draconian Covid lockdowns were eased and regulators telegraphed a less severe approach to policing China’s tech sector almost a year after kicking off an unprecedented crackdown.

Both US and European investors poured record sums into the Chinese market, with US-listed ETFs taking in a net $4bn and those domiciled in the Europe, Middle East and Africa region sucking in $1.8bn, according to data from BlackRock. The combined total of $5.8bn comfortably exceeds the previous record of $4.3bn set in January.

The European buying spree occurred even as Emea investors pulled money from both US equity ($900mn) and European equity ($800mn) ETFs.

“European investors are not really buying US equities, not really buying Europe, but they are buying China. That’s a marked change in global flows,” said Natasha Sarkaria, investment strategist at BlackRock.

Phillip Wool, head of investment solutions at Rayliant, an emerging market-focused asset manager, said two things had changed in China.

First, a view that Chinese technology companies had become “oversold” coincided with “a lot of signalling that the regulatory crackdown that started a year-and-a-half ago has reached its peak and Chinese regulators want to become more collaborative with these tech companies”.

Second, Wool said China’s growth outlook had “soured” in recent months amid the Covid lockdowns, leaving the country struggling to meet Beijing’s “lofty” growth targets in the run-up to November’s Communist party congress, when President Xi Jinping is expected to secure a third term.

So, “when the Covid lockdown eased in May it allowed China to pump stimulus into the economy” in the shape of interest rate cuts, fiscal stimulus and higher infrastructure spending, he said.

As a result, China’s stock markets outshone rival bourses in June, with the CSI 300 index returning 9.6 per cent even as virtually every other stock market fell amid gathering fears of stagflation. Only Russia’s RTS Index, with a gain of 11.3 per cent but out of reach to western investors, performed better, and that has since given up all its gains.

Karim Chedid, head of investment strategy for BlackRock’s iShares arm in Emea, believed it was this outperformance that sucked western investors back into China, but warned it might not last.

“We will probably see some stop-start activity around Covid lockdowns in the second half,” he said, as Beijing continues to implement a harsh zero Covid strategy.

In contrast, with US equities looking “terrible” as the Federal Reserve “looks pretty locked in to a series of rate hikes”, Wool believed the Chinese stock rally could continue “for most of this year, and maybe beyond” as investors seek diversification.