China A-Share ETFs Not In Line Of Fire

January 08, 2016

The ongoing sell-off in China’s mainland stock market this week has been so steep, circuit breakers were triggered and trading halted completely twice in four days.

Yesterday morning, the market was open less than 15 minutes before a 7% decline had all trading stopped for the day. The very circuit breakers that were designed to help minimize losses are now being blamed for exacerbating them, and Chinese regulators have stepped in and suspended their use.

George Magnus, senior economic advisor to UBS, offered a great explanation of what’s happening in China’s stock market this week and the challenges it faces going forward. It’s worth a read.

Fleeting Confidence

The gist of Magnus’ assessment is that China’s problems go deeper than whether circuit breakers work in mitigating market volatility. According to him, there’s growing lack of investor confidence due to several factors, such as ineffective government intervention in the market; worsening “indebtedness and slowing growth;” economic reforms that are, as he put it, “stuck in the mud;” and concerns—not to say confusion—over the country’s currency policies, which have now put the yuan in a downward path.

All of these factors have many investors looking for the exits, helping push China’s A-share market—stocks that trade on the mainland exchanges—sharply lower.

“It’s hard to see an immediate end to turbulent market conditions, or the attainment of lasting stability while many of the uncertainties I’ve alluded to persist,” Magnus concluded. “And persist they will.”

But to U.S. ETF investors who own funds allocated to mainland Chinese stocks such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | F-54), for example, the latest turmoil in China’s market may be insignificant longer term.

That’s because U.S.-listed funds already trade when Chinese markets are closed. ASHR is tied to the same index circuit breakers that are tied to the CSI 300, and it has $370 million in total assets. The fund has seen an average of $63 million trade hands every day. The ETF offers exposure to China’s most liquid stocks listed on the Shanghai and Shenzhen exchanges.

Thursday morning, ASHR traded some 5% lower on the heels of the latest market decline, putting its losses in the first week of the year at roughly 12%. But the fund has been trading efficiently, with pennywide spreads.

In the past 12 months, the fund has declined 15.6%, as the chart below shows:

Chart courtesy of StockCharts.com

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