One Year Later, China ETFs See More Stability

There is divergence, though, between Hong Kong shares and mainland ones.

A year ago, all eyes were on China. Concerns about the Chinese economy and fears of a possible repeat of the 1997 Asian financial crisis sent the S&P 500 down more than 5% on Aug. 24 as the Chinese stock market plunged.

ETF investors feared China was headed to a massive crash. Those fears were reinforced last January when the market took another dip, and the S&P 500 dove to a two-year low amid concerns about a global slowdown.

In the past 12 months, ETF investors yanked nearly $2.5 billion from China equity ETFs. The lion’s share of those net redemptions were in the largest China equity ETF, the $3.85 billion iShares China Large-Cap ETF (FXI), which has bled $1.9 billion in outflows in 12 months.

But fast-forward to today—and after several measures from China’s government that included banning short-selling in the country's stock market, halting the trading of more than 1,000 stocks, and cutting interest rates six times in a year—China has not crashed. FXI is in fact up 5% on the year, recovering from earlier losses and delivering positive gains to investors. 

Chart courtesy of StockCharts.com

China may not be growing at an 11%-a-year clip anymore, but many pundits today argue that long-term growth prospects of the world’s second-largest economy isn’t going to be derailed by stock market corrections.

In fact, China’s GDP at the end of the second quarter exceeded expectations, according to CNBC, reaching 6.7% year-on-year thanks in part to government stimulus.

Tale Of Two Chinas

What is notable in the past 12 months is the divergence in performance between a fund such as FXI that owns Hong-Kong-listed securities, and the performance of a fund such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)—the largest ETF in the market offering exposure to the 300 largest Chinese companies listed on the Shanghai and Shenzhen exchanges, known as A-shares.

ASHR is down nearly 5.2% in the past year. That’s a 10-percentage-point divergence in returns between this fund and FXI. That’s unsurprising, considering that China’s mainland stock market is one of the worst-performing in the past year.

But ASHR’s performance can’t be looked at without the context of what preceded it. In the first half of 2015, ASHR actually rallied more than 43%—or roughly three times the gains FXI posted in the same period. That stellar run set the fund up for a far more dramatic correction last August when the market took a nose dive.

Still, U.S. investors haven’t been as quick to trim exposure to China’s mainland stocks as they were to Hong Kong-listed securities in funds such as FXI. In fact, ASHR has seen net positive inflows of about $41 million in the past 12 months. Today ASHR has $456 million in total assets.

Contact Cinthia Murphy at [email protected].