China ETFs Plunge on Dashed Stimulus Hopes
China ETFs fell more than 10% on Tuesday.
The eye-popping rally in China exchange-traded funds hit a bump on Tuesday as traders used an uneventful press conference as a reason to sell.
The three biggest U.S.-listed China ETFs—the $8.1 billion KaneShares CSI China Internet ETF (KWEB), the $7.8 billion iShares Trust – China Large-Cap ETF (FXI) and the $6.1 billion iShares MSCI China ETF (MCHI) were each down by around 10% on the session.
In a widely watched press conference, the head of China’s economic planning agency, the National Development and Reform Commission, said that he was “fully confident in achieving the annual economic and social development targets.
However, his remarks, which contained hints of economic support, fell far short of the unveiling of big fiscal stimulus for which many investors had hoped.
Leading up to the press conference, KWEB had skyrocketed by more than 50% over two weeks on the back of lower interest rates and promises of significant government fiscal support.
The sustainability of such a remarkable rally likely requires bigger monetary and fiscal stimulus than the government has so far delivered. On top of that, investors will want to see that stimulus translate into stronger economic growth and corporate profits.
A Speculative China ETF Rally
Until then, the surge in China ETFs is largely a function of speculation and multiple expansion.
The MSCI China Index currently trades with a forward P/E of 11.7, up from close to 9 at the start of the year.
Over the past two decades, the forward P/E has averaged 11.4, meaning that Chinese stocks are trading at a premium to their 20-year average based on that metric.
Of course, if earnings come in higher than expected due to any stimulus measures the Chinese government implements, Chinese stocks might be cheaper than the current forward P/E suggests. And if that’s the case, then the rally might have legs still.
On the other hand, any economic or earnings disappointments would likely be met with selling, pushing China stocks and ETFs back down.