Hundreds of billions of hot money poured into US-listed Chinese concept ETFs, asset management companies expect the optimistic sentiment to continue

According to CNBC, in the past week, during the Chinese mainland financial market closure for the National Day holiday, investors injected $5.2 billion (approximately RMB 36 billion) of new assets into U.S.-listed exchange-traded funds (ETFs) targeting the Chinese market. Some asset management companies hope that this optimism can continue.

At the end of September, the Chinese government announced a package of stimulus measures, which led to the largest single-day gain in the Chinese stock market since 2008 on September 30. Tuesday was the first working day in the Chinese mainland after a week-long holiday, and the market continued its upward trend. By the close, the Shanghai Composite Index rose by 4.59%, the ChiNext Index surged by over 17%, and the total turnover of the Shanghai and Shenzhen stock exchanges exceeded RMB 3.4 trillion, setting a historical record.

The Chinese government's measures have made some people optimistic, believing that this support will maintain and prolong the shift in investor sentiment. Data from Morningstar shows that $5.2 billion flowed in as of the week ending October 4, compared to an average weekly outflow of $83 million so far in 2024 and $27 million last year.

Michael Reynolds, Vice President of Investment Strategy at Glenmede Trust, a boutique wealth management firm in New York, said, "The market has been waiting for China to make credible commitments to revive its economy. Now we need to see follow-up actions."

Authorities also announced plans to increase investment in domestic ETFs. It was reported that the China Securities Regulatory Commission (CSRC) announced at the end of September plans to quickly approve new ETFs that will track the "Star Market" in China, directing more funds to ETFs based in the Chinese mainland. The Star Market is a section of the Shanghai Stock Exchange dedicated to listing technology companies.

Jonathan Krane, Founder and CEO of KraneShares, said, "The Chinese stock market has been oversold." According to Morningstar data, his flagship ETF, KraneShares CSI China Internet, attracted $1.39 billion in new assets just last week, reversing the fund flow trend to inflow since the beginning of the year.

Data from TrackInsight, a Paris-based data analysis company, shows that over twenty ETFs focused on China achieved double-digit returns in a week, ranging from 10% to 28%, outperforming over 3,000 ETFs traded in the U.S. market last week. The $8.3 billion KraneShares ETF is just one of them.

Krane believes that the surge in stock prices is just the beginning, as investors have relatively low exposure to Chinese stocks after a significant drop in the Shanghai and Shenzhen 300 Index in February. Krane added, "This is just a small part of the world returning to the Chinese market, or I need to reconsider China, this is just early money."

In the past week, the majority of funds flowed into the largest ETFs, which provide broad exposure to a range of Chinese large-cap stocks. Morningstar data shows that the iShares China Large-Cap ETF saw $2.7 billion inflows last week Michael Barrer, Capital Markets Head of ETFs at asset management firm Matthews Asia, stated: "When the market volatility is so intense, funds will first flow into these (index-linked) products." Despite this, following a net inflow of $11.7 million last week, the assets of the $44.8 million Matthews China Active ETF surged significantly.

Jason Hsu, Founder and CEO of asset management firm Rayliant Global Advisors, pointed out that in order to keep these new assets in China-focused ETFs, the Chinese government will need to announce a series of detailed and far-reaching reform measures. He stated: "The next move by the Chinese government must be to formally introduce new stimulus plans and increase the timetable."

Dave Mazza, CEO of Roundhill Investments, noted a shift in investor sentiment. Roundhill recently launched the Roundhill China Dragons ETF, focusing on what Roundhill considers the nine largest and most innovative Chinese tech companies. Mazza mentioned that it attracted a net inflow of $35 million in the first two trading days. Mazza said: "We believe that at some point soon, the tide will turn, and China will once again become an investable opportunity."