Bottom Fishing In China Not Safe

August 30, 2021

[ETF Pulse appears Mondays and Thursdays. Drew Voros is Editor-in-Chief of ETF.com.]

If you really want to catch rainbow trout in Lake Tahoe’s Truckee or Carson rivers during the spring snowpack runoff, you’re advised to drop fly away from the pooling waters, according to my local sources.

 

“Go to the steady current shallows with pebbles, not the pools … the good ones are swimming upriver, that’s where rainbows roll.”

There is no rainbow trout in China capital markets right now. It’s dire. There is no natural river current, just a current clampdown. To invest in China is fueling the clampdown. It’s not good for your money.

Be Careful Where You Fish

Chinese stocks and the relative U.S.-listed ETFs are the obvious deep-value pools that look ripe. I wouldn’t fish in that China pool with a 10 foot pole.

China is the heavy hand clamping down on its capital markets. There’s zero bottom-fishing value in China’s pivot to totalitarianism.

“China intends to ban US stock listings for tech companies with vast troves of sensitive user data.” —Market Insider

Others See Differently

Without a doubt, Cathie Wood is an ETF superhero. She’ll go down in ETF history.

Her firm ARK Invest is dropping bait in that high-risk pool, as ETF.com’s Dan Mika reported:

“An ETF.com analysis of ARK’s trade notifications since last Thursday shows the firm has bought a net 1.17 million shares of JD.com and its JD Logistics subsidiary, along with about 235,000 shares of Tencent and 85,824 shares in farmer-to-consumer firm Pinduoduo.

The majority of those shares were placed into the ARK Space Exploration & Innovation ETF (ARKX) and the ARK Fintech Innovation ETF (ARKF), while JD.com was lifted to the eighth largest holding in the ARK Autonomous Technology & Robotics ETF (ARKQ).”

 

Ticker Company Net Shares Bought/Sold
2618HK JD Logistics 949,290
TCEHY Tencent Holdings 234835
JD JD.com 223835
PDD Pinduoduo 85824
BABA Alibaba -84201
BIDU Baidu -84975
1833HK Ping An Healthcare and Technology Company Limited -1427400
3690HK Meituan -1551582
6060HK ZhongAn Online P & C Insurance Co., Ltd. -2228500

Source: ARK Investment Management

(Read: ARK Buys Back Into China Stocks)  

 

Working For the Clampdown

But with China’s government tightening restrictions around thriving companies, you can expect your fishing line to be cut. Private tutoring today, tobacco, alcohol and internet service provider companies tomorrow.

There are no reasonable sector plays here.

China equities are both the biggest uncertainty and opportunity to come along in a long time; buckle up. It’s time for active managers to step up. Cathie Wood is a step ahead of Wall Street, as usual, but this could be a big misstep.

Personally, I’m not buying into that regime.

KWEB Spins Curious Snapshot

ARK Invest isn’t the only boat bottom-fishing rough China Seas. Take a look at the train wreck of the KraneShares CSI China Internet ETF (KWEB). On the surface again, it looks like bottom fishing. But it’s more than that. Sharks are swimming in that pool, looking for hedging opportunities.

ETF.com’s Sumit Roy wrote on that subject, in case you missed it. (Read: Investors Not Giving Up On ‘KWEB’):

“Despite a crushing decline in prices for the KraneShares CSI China Internet ETF (KWEB), investors are still adding money to the fund.”

 

Chart courtesy of StockCharts.com

 

“There is also the possibility investors may be using KWEB for more complicated strategies that involve pair trades; for instance, going short a specific Chinese internet stock and buying the ETF as a hedge.”

A New Rodeo

If someone tells you, “This is nothing new; just another Chinese rodeo,” they’re correct. China changes on a dime like a bucking bronco. With China, you should take a very long-term view: Think 2050, not 2025.

More than five years ago, China dove into capital markets and saw what efficient market pricing does. The government quickly reversed course. As ETF.com’s Roy reported on Jan. 11, 2016:

“On Thursday, authorities suspended those circuit breakers after conceding that they may be doing more harm than good by driving investors into a panic. The flip-flop only added to the sentiment that the Chinese government doesn't know what it is doing.” (Read: Here’s Why China's Stock Market Sunk)

Voting is the best protest. A close second is where you put your money. You don’t have to invest in China, and in my opinion, you should not. This is a chance to vote with your money.

If you’re worried about missing out on that sweet emerging market growth opportunity, consider a fund like the Freedom 100 Emerging Market ETF (FRDM), which excludes China and other developing markets due to their disregard of personal and economic freedom.

Drew Voros can be reached at [email protected]

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