Why strong inflows into Chinese funds may not be a sign of confidence
Investors bought Chinese equity funds lower last week. Don’t necessarily take it as a bullish sign.
Chinese stocks fall again amid concerns that Beijing could extend its regulatory crackdown to the gaming industry. Shares in gaming giants
(ticker: 700.Hong Kong) and
(NTES) fell in trading on Tuesday. the
iShares MSCI China
The exchange-traded fund (MCHI), which owns some 600 Chinese stocks listed on the stock exchange and overseas, was down 1.4%.
The latest bout of volatility comes after Chinese stocks sold off last week, sparked by Beijing’s crackdown on the private education sector. Stock prices have rebounded a bit but are down again.
While it’s difficult to predict future regulatory risks in the Chinese market, trade data suggests recent volatility has yet to trigger a mass exodus, at least since last week. In fact, investors bought the decline.
In the seven days to last Wednesday, global investors invested $ 3.6 billion in Chinese equity-focused funds despite the massive sell-off, according to fund research firm EPFR Global. Dig a little deeper, however, and there was a clear split in sentiment between institutional and retail investors.
Institutional investors, both onshore and offshore in China, took the opportunity to increase their holdings in China at a lower price, adding nearly $ 3.9 billion of Chinese equity funds to their portfolios. This marks the strongest weekly net entries since February.
Retail investors, on the other hand, sold $ 266 million worth of Chinese equity funds during the same period, marking the largest weekly outings of the year to date.
“Retail investors are much easier to scare off and amplify downturns,” says Cameron Brandt, research director at EPFR. “For institutional investors, I think a significant portion of them saw this as a buying opportunity.”
Still, the level of retail sales is not as extreme as it was in 2015, when Chinese stock prices started to decline. There was a significant exodus of retail investors around this time, all trying to get out at the same time, Brandt says.
“I think the Chinese authorities have gotten better at controlling fluctuations in the market,” Brandt said. Barron. “They lived that [kind of volatility] a few times now. There is a playbook when there are signs of a market correction or retail investors could be on the verge of a rush. ”
Many institutional investors are assuming that the Chinese government will not be a passive player in these situations, he notes, and that Beijing will use the tools at its disposal to maintain a floor below the market. This includes guiding SOEs and other domestic institutions to step up and buy stocks – or at least not sell them – to stabilize the market.
But large capital flows into Chinese funds are not always a bullish signal, according to Citigroup analyst Scott Chronert. Instead of buying the downside and planning to hold for the long term, some investors might rush to these funds for short-term trading, he wrote in a note last week.
ETFs with targeted exposure to high-growth Chinese stocks, for example, could be used as a hedging vehicle by options traders to provide downside protection in the event of further regulatory crackdown.
KraneShares CSI China Internet
ETF (KWEB) has seen its share price drop by half since the February peak, but it still attracted $ 3.5 billion in new assets, or about two-thirds of its $ 5.3 billion current.
Likewise, following the recent liquidation, the
iShares China Large-Cap
The ETF (FXI) registered $ 467 million in entries, or about a tenth of its $ 4.9 billion in assets, last Thursday and Friday alone. The fund tracks the top 50 Chinese stocks traded on the Hong Kong Stock Exchange, most of which tend to be growth-oriented tech names.
However, in the options market, bearish traders’ bets on both funds have reached new highs since the start of the year in recent months, Chronert noted. The volume of transactions in these funds has also increased significantly, which generally indicates an increase in hedging activity.
More hedging activity could stimulate demand for these ETFs. Some investors may buy these funds so that they can lend them to short sellers or sell to put option buyers. “Various Chinese ETFs have given investors an outlet to express more specific views and trade recent volatility,” he wrote.
Nonetheless, data on ETF flows suggests that investors largely view China’s regulatory risks as the country’s unique problem, rather than a contagious problem for all emerging markets. Although flows to emerging market ETFs have slowed since the first quarter due to their relatively weak performance, there is no evidence of further weakness from Chinese volatilities.
Chinese stocks typically make up 30-40% of emerging market indices.
Write to Evie Liu at [email protected]