Feb 20 (Reuters) – Three straight years of losses from
Chinese markets and anti-Beijing rhetoric from Washington have
not deterred some U.S. asset managers from introducing products
they hope will thrive if Chinese stocks rebound.
China’s markets have been hit by a long-lasting property crisis,
slowing growth and geopolitical tension. The Institute of
International Finance estimates $80 billion of outflows from
Chinese portfolios last year, and the bellwether blue-chip CSI
300 Index has fallen 43% from its record high of three years
ago. China’s markets, which reopen on Feb. 19 after the Lunar
New Year holidays, are down nearly 2% year-to-date, bouncing off
lows on support measures from Beijing.
Despite the extended pain, U.S. fund managers with
China-focused products have been betting that investors will
want to return to the market, arguing that valuations make the
country hard to ignore.
China’s CSI 300 index currently trades at 12 times trailing
12-month earnings, while the S&P 500 index’s valuation is at 24
times 12-month earnings, according to Morningstar Direct.
“This is potentially a once-in-a-lifetime opportunity to buy
China equities at valuation levels not seen for a long time,”
Jonathan Krane, CEO of China-focused ETF provider KraneShares,
said in an email.
KraneShares has launched four new China-focused
exchange-traded funds since the beginning of 2021. Its roster
also includes one of the largest China-focused ETFs, the
KraneShares CSI China Internet ETF. Launched in 2013,
it has about $5 billion in assets.
China’s sheer size and economic growth rate – even if lower than
in past years – means investors need to have it in their
allocations, fund managers argue.
“Do we fundamentally think that the second-largest economy
in the world plays a role in investor portfolios? Yup, no
question,” said Bryon Lake, global head of ETF Solutions at JP
Morgan Asset Management. The firm launched the JPMorgan Active
China ETF in March 2023, which now has about $9.2
million in assets.
In total there were four U.S.-based, China-focused ETFs
launched in 2023, compared with two the prior year and eight in
2021, according to Morningstar data, making a total of 48
US-based, China-focused ETFs at the end of 2023. That takes into
account both openings and closures and is a figure little
changed in the last several years but up 46% in the last decade.
CHALLENGES IN CHINESE MARKETS
Fund managers, however, have both economic and political
challenges with China’s markets, from U.S. scrutiny of Chinese
investments to an unpredictable environment in China, where
there can be sudden resignations or regulatory crackdowns.
“The bear market scenario for China revolves around
government policy, trade relationships and other political
actions that surprise market participants,” said Rich Nuzum,
global chief investment strategist at Mercer.
The dour sentiment has led some funds to close. Global X Funds
plans to shutter ten of its 11 China-focused ETFs, which target
a specific sector and together have an average of $7 million in
assets. The remaining fund, the Global X China MSCI Consumer
Discretionary ETF, is the largest, with assets of
$215.4 million.
Global X “probably went a step too far in anticipating that
there’d be a China recovery and that it would be broad enough to
spill over into sector funds,” said Bryan Armour, ETF strategist
at Morningstar. “Slicing up the China market that specifically”
may have been over-optimistic, he added.
Global X declined to comment on the closures and could not
be reached for comment on the assessment of why they closed.
BUILDING BLOCKS
China-focused asset managers hope that being ready with an
established fund — complete with a track record — will
position them to profit most if China rebounds.
Since it typically takes at least six months to roll out a
new ETF and the process can be longer for asset managers that
have to venture into new territory, having a product with a
track record ready to scoop up fast-moving inflows can transform
a tiny fund into a large player overnight.
“There are tremendous first-mover advantages in the ETF
space” for asset managers willing to battle the headwinds, said
Michael Barrer, head of ETF capital markets at Matthews Asia.
Matthews Asia, an investor in China for nearly 30 years,
has launched a dozen ETFs targeting Asia, including two devoted
to China and several others that include Chinese stocks since
July 2022. “That way, when the tide turns, we have product that
is readily available.”
The firm launched the Matthews China Active ETF last
July and the Matthews China Discovery Active ETF in
mid-January. The latter targets smaller growth stocks.
In any environment, launching new products — and keeping
existing ETFs alive — requires careful planning, issuers say.
“Having or adding a China-focused ETF to your family may
make perfect sense, because this is a ‘building block’ that
investors will want to use strategically” to get exposure to the
world’s second-largest national economy, said Matthew Bartolini,
head of SPDR Americas research for State Street Global Advisors.
(Reporting by Suzanne McGee and Megan Davies; editing by
Paritosh Bansal and Josie Kao)