One of the biggest financial news stories of 2015 was the bursting of China's stock market bubble. Though the bleeding has slowed, the stock market in China continues to struggle this year.
The VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT | D-55) shed 23.6% year-to-date. Other China ETFs such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-65), down 17.3%, and the iShares China Large-Cap ETF (FXI | B-42), down 8.8%, are also lagging.
YTD Returns For CNXT, ASHR, FXI
The most obvious concern for China investors is the slowing economy. GDP growth edged further under 7% this year as the country continues to transition away from a manufacturing-based economy and toward a consumption-based model.
But that may not be the only problem. Some investors, such as hedge fund manager Kyle Bass, believe that China may be on the brink of a credit crisis larger than even the U.S. subprime crisis of 2007 to 2009.
"Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets," Bass wrote earlier this year. "China will likely have to print in excess of $10 trillion worth of yuan to recapitalize its banking system. By the time the loss cycle has peaked, we believe the [yuan] will have depreciated in excess of 30 percent versus the U.S. dollar."
If Bass is right, the losses in China ETFs could get much worse. On the other hand, some investors are more optimistic, and see a scenario in which the Chinese government successfully orchestrates a "soft land" for the economy.
Along with China, another Asian heavyweight is doing poorly this year: Japan. ETFs such as the WisdomTree Japan Hedged Equity Fund (DXJ | B-63) and the iShares Currency Hedged MSCI Japan ETF (HEWJ | D-37) have fallen notably in 2016.
DXJ is down 13.5% year-to-date and HEWJ is down 11.8%.
Japan currency-hedged funds have performed the worst, despite an ongoing monetary policy there designed to weaken the yen, which hasn’t been happening as expected. Vanilla Japan ETFs, like the iShares MSCI Japan ETF (EWJ | B-95), are faring much better thanks to the appreciation of the yen versus the U.S. dollar. EWJ is down a much more modest 2.6%.
YTD Returns For DXJ, HEWJ, EWJ
For Japan, investors may finally be throwing in the towel after three years of Abenomics failed to deliver the economic growth that many had hoped for. In 2015, Japan's economy grew a disappointing half a percent despite massive amounts of stimulus from the Bank of Japan.
The recent new paradigm of negative interest rates in the country may also be hurting sentiment. Additionally, the rise in the yen hurts Japanese exporters, which make up a big chunk of the country's stock market.
Contact Sumit Roy at [email protected].