Coronavirus Weighs On China ETFs

Chinese stocks were hammered on Monday as mainland markets reopened for trading following an extended Lunar New Year holiday. The Shanghai Shenzhen CSI 300 Index plunged 7.9%, its worst single-session loss since August 24, 2015.

The index was briefly down as much as 9.1%, with 90% of Chinese stocks falling by the 10% daily limit at one point, according to Bloomberg. The enormous sell-off was the result of investors getting their first chance in a week and a half to react to the spread of the deadly coronavirus, which has infected thousands in China.

Death Toll Climbs

According to the latest tally, the virus has infected 17,205 people and killed 361 in China so far. The death toll eclipses the 349 people that died on mainland China from the 2002-2003 outbreak of SARS.  

The Chinese government has taken drastic measures to contain the outbreak of the coronavirus, going as far as to quarantine millions of people in Wuhan, the epicenter of the virus, and elsewhere. Altogether, cities containing 61 million people are facing lockdowns in China.

Millions more have fearfully hunkered down, leaving many streets and public places in major cities like Beijing deserted.

At the same time, as the coronavirus spreads internationally, many governments and airlines have restricted travel into and out of China. The U.S. is temporarily restricting foreign nationals who have been to China in the past two weeks from entering the country. Countries from Singapore to Australia to Italy have also banned incoming flights from China.

Growth Impact

The sudden and significant shock to China caused by the coronavirus will almost certainly reduce economic growth in the world’s second-largest economy. China’s economy was just starting to recover from the trade-related woes of 2019, but according to Goldman Sachs, the country’s GDP growth in 2020 could slow to 5.5% from 5.9% due to the virus.

Of course, no one can be sure just how bad the contagion ultimately ends up being, so growth could end up even worse than that. But for now, forecasters are assuming that the virus, which is considered more pervasive, but less deadly than others like SARS and Ebola, won’t dent the economy too much.

China ETFs Hold Steady

Despite Monday’s nearly 8% drubbing in Chinese stocks, markets largely agree with that relatively sanguine view of the coronavirus economic impact. The Shanghai Shenzhen CSI 300 Index is only back to where it was five months ago and is still up 24% from its January 2019 lows.

China ETFs that track mainland stocks show a similar pattern, down, but within recent trading ranges. The $2.2 billion Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) was only trading lower by about 1.5% on Monday as the ETF had largely priced in the recent virus news over the past week while mainland markets were shut.

ASHR: Holding In The Range 

It’s a similar picture for Hong Kong-focused ETFs. The $4.5 billion iShares China Large-Cap ETF (FXI), which tracks shares of companies traded on the Hong Kong Stock Exchange, was actually up by 1% on Monday. The broader iShares MSCI China ETF (MCHI), which holds a combination of all investable Chinese shares and has $4.6 billion in assets, rose by 1.6%.

Weighing The Impact

To be sure, no one is giving the all-clear sign for China stocks and ETFs. If history is any guide, the impact from the coronavirus will be sharp, but short. However, if the virus mutates or in any way becomes much more potent than currently imagined, the impact could be much greater, turning into a black swan event of some sorts.

In these negative scenarios, the sell-off in Chinese stocks will likely get worse.

Of course, even in the current optimistic scenarios that are being bandied about, the rout could deepen, especially considering that many Chinese stocks hit "limit-down" on Monday. Everyone who wants to sell may not have had the opportunity to do so, and support from the Chinese government, including a $22 billion liquidity injection, may have temporarily limited the damage to markets.

Investors in China ETFs have a lot to consider, and must weigh the short-term coronavirus impact on China against the country’s long-term potential.

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​Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2