China ETFs Continue to Tumble Amid Economic Woes

One of the worst performing stock markets of 2023 is off to a rough start in the new year. The MSCI China Index is down 2.7% so far this year, adding to losses of 11% last year. 

Zhongzhi Enterprise Group, a Chinese lender, filed for bankruptcy over the weekend, fueling concerns about the health of China’s financial system and property market.

For investors in the most popular China ETFs—many of whom expected a rebound in Chinese stocks following the country’s post-Covid reopening—recent performance has been disappointing.

The $5.8 billion iShares MSCI China ETF (MCHI), which holds a broad basket of Chinese stocks listed in mainland China, Hong Kong, the U.S. and elsewhere, is 4.4% lower this year after tumbling 11.2% in 2023. 

The losses are similar for other China-related ETFs.

The $5.3 billion KraneShares CSI China Internet ETF (KWEB), which focuses on Chinese tech companies, is down 5.4% on top of last year’s 9% decline; while Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which exclusively holds China stocks listed on the mainland, is down 4.8% after falling 12.5% last year.

Investors Pulled $1 Billion Out of China ETFs Last Year 

In addition to economic fears, nagging worries about geopolitics (Taiwan, trade wars) and regulations (the crackdown on tech companies) have also caused investors to shun Chinese stocks despite relatively low valuations.

Investors pulled a net $1 billion from 54 U.S.-listed China ETFs over the past year, according to data from Bloomberg.

However, a few China ETFs did see notable inflows during that period, including the Direxion Daily FTSE China Bull 3X Shares (YINN)—which picked up $771 million of new money—and the Direxion Daily CSI China Internet Index Bull 2x Shares (CWEB). 

The number suggests that even as certain investors sour on China stocks and ETFs, a certain segment of investors—aggressive short-term traders who use leveraged ETFs—are still expecting a rebound.