Downturn in Chinese Stock Market... Wall Street's "Skepticism on China Bets"

Launch of 23 Emerging Market Investment ETFs Excluding China
"Capital Outflow Is Just the Beginning"

As the Chinese stock market continues to decline, there is a noticeable trend on Wall Street to avoid investing in Chinese stocks.

On the 14th (local time), Bloomberg reported that Direxion, a U.S. financial product provider, recently launched a leveraged emerging markets exchange-traded fund (ETF) that completely excludes investment in Chinese stocks. This ETF includes large-cap and mid-cap stocks from 23 of the 24 emerging market countries, excluding China.

Edward Egilinsky, Director at Direxion, explained, "Last year, the Chinese stock market experienced losses, which contrasts with the gains seen in South Korea, India, Taiwan, and other emerging markets. Amid the geopolitical turmoil surrounding China, some traders want to maintain broad exposure to emerging market countries while excluding Chinese stocks."

Due to China's real estate crisis, deflation, slowing growth, and rising youth unemployment, interest in investing in China is fading across Wall Street and elsewhere. The MSCI China Index has dropped nearly 7% this year alone, falling 60% from its peak in 2021. A recent Bank of America (BoA) survey also showed an increasing sell-off trend in Chinese stocks.

Last year, the best-selling emerging market fund globally was the iShares MSCI Emerging Markets ex China ETF (EMXC), which tracks emerging market indices excluding China. According to Bloomberg, its assets under management reached approximately $10 billion (about 13 trillion KRW).

Heber Chen, Emerging Markets Analyst at IG Markets, said, "Over the past three years, skepticism has grown amid turmoil in various sectors, and recent market and economic disruptions have fully revealed this skepticism." Bloomberg explained, "Recently, investors are not only removing China from their portfolios but also investing in ways that align with pessimism."

BoA stated that last week, an unprecedented $19.8 billion (about 26 trillion KRW) was invested in funds focused on Chinese stocks, but this appears to have been led by Chinese state-owned investors.

Fund managers investing in Chinese stocks are struggling to minimize losses. William Fong, Head of China Hong Kong Equities at Baillie Gifford, said regarding Baillie Gifford’s holdings in Chinese stocks, "They are composed of defensive and income-generating assets due to low volatility and attractive current valuations," adding, "Capital has not been effectively allocated across the economy. This is a key area that Chinese government agencies need to improve next year."

David Oneglia, Global Data TS Lombard Director, said, "Capital outflows from Chinese portfolios are just the beginning," and added, "While a series of measures implemented by the Chinese government have helped, structural drivers will continue to dominate the broad financial cycle."