China Stimulus Unleashes ETF Buying Spree in US and Europe

The global investment landscape witnessed a significant shift in September, as foreign exchange traded fund (ETF) investors turned their attention towards Chinese equities. This shift was driven by a series of stimulus measures announced by the People's Bank of China, which included monetary easing, support for the property market, and a Rmb800bn fund to boost the stock market. The war chest expanded the activities of China's "national team" of sovereign wealth funds, most notably Central Huijin Investment, which have ploughed billions of renminbi into domestic equity ETFs over the past 12 months in a bid to boost the onshore A-share market and rekindle investor confidence.

The CSI 300 index of Shanghai and Shenzhen-listed companies responded by jumping 32% in the space of two weeks, before slipping back 7% on Wednesday. Despite the rally, the blue-chip index still remains 32% below its February 2021 peak. Overseas ETF investors played their part, launching a buying spree that represented a dramatic volte-face. In the final four trading days of September, investors pumped $1.6bn into US-listed exchange traded funds focused on China while similar funds listed in Europe pulled in $753mn, according to data from TrackInsight.

This was a sharp contrast to the pattern seen so far this year: in the near-nine months to September 24, US investors withdrew a net $5.1bn from China-focused ETFs while their European counterparts cut their exposure by $331mn. The newfound inflows, however, remain dwarfed by domestic flows. Asia-Pacific listed China equity ETFs have vacuumed up a net $127bn so far this year, according to data from BlackRock. The vast majority of this is likely to have stemmed from ETFs listed in China itself, in part due to the machinations of the national team.

Despite the U-turn in ETF flows, enthusiasm in some quarters towards Chinese equities remains tempered. The BlackRock Investment Institute moved from a neutral position to a "modestly overweight" view on China in the wake of the stimulus announcement, magnified by the onshore A-shares market's lower valuation than developed market equities. However, it said it remained "cautious long term given China's structural challenges" and was "ready to pivot" to a gloomier view if deemed necessary.

Rony Abboud of TrackInsight cautioned that regulatory risks from both US regulators — in respect of security and audit concerns — and their Chinese counterparts — given their past crackdowns on big tech — "are still major factors" in many investors thinking. Moreover, "there's scepticism about the long-term impact of the recent stimulus. While it may ease short-term pressures, it's not seen as enough for a strong recovery without further fiscal support," Abboud added. "Time will tell if the bounce was a short squeeze or a sustainable rally," said Matthew Bartolini, head of Americas ETF research at State Street Global Advisors, given that short interest in China-focused single-country ETFs "had been elevated" beforehand and trailing three-month inflows "the worst they had ever been entering September."

In conclusion, the recent stimulus measures by the People's Bank of China have sparked a buying spree in Chinese ETFs by foreign investors. However, regulatory risks and geopolitical tensions remain key factors influencing global investors' decision-making regarding Chinese equities. The long-term impact of the recent stimulus and the sustainability of the rally will be crucial in determining the future of China's equity market.