Chinese Stock ETFs Slide Amid Economic Data and Property Sector Concerns

Exchange-traded funds (ETFs) that invest in Chinese stocks are experiencing a downward trend, with consecutive weekly losses following disappointing economic data and growing concerns about the country's property sector.

The iShares MSCI China ETF (MCHI), which manages approximately $8 billion in assets, recorded a 0.8% decrease on Monday, putting it on track for its worst month since May, according to FactSet data. As of August 11, the fund's largest holdings included Tencent Holdings, Alibaba Group Holding, Meituan, China Construction Bank Corp., and JD.com Inc., based on information from BlackRock's website.

On Monday, worries about China's economy intensified after Country Garden Holdings Co. suspended trading in some offshore bonds. This move served as a reminder of the volatility experienced in the Chinese property market in previous years and reinforced the reality of recession risks in China, according to Tom Essaye, founder and president of Sevens Report Research. He also highlighted last week's downbeat trade data from China, with both imports and exports falling short of estimates.

So far in August, the iShares MSCI China ETF has declined by approximately 8.7%, while the KraneShares CSI China Internet ETF has seen an even steeper plunge of over 10%. The KraneShares CSI China Internet ETF (KWEB), which manages around $6 billion in assets, is also headed for its worst monthly performance since May, according to FactSet data.

According to Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, further evidence of a deeper growth deceleration in China poses a clear near-term risk to sentiment and earnings. She specifically pointed to challenges in the property market and lackluster Chinese credit data from Friday, suggesting that the weaker-than-expected volume of new loans in July is likely due to intensified advanced mortgage repayments and a sequential deterioration in housing sales.

China-focused ETFs Experience Decline as Country's Growth Disappoints

Shares of China-focused exchange-traded funds (ETFs) faced a decline on Monday, as the country's growth failed to meet expectations. The Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) fell by 0.3%, while the Rayliant Quantamental China Equity ETF (RAYC) dropped by 0.5%. Similarly, the KraneShares CSI China Internet ETF experienced a 0.4% decrease, according to FactSet data.

The data miss on credit is being interpreted as a sign of weak end demand and inadequate support measures from Beijing, according to Marcelli, an expert in the field. He further stated that the deteriorating macroeconomic outlook should compel policymakers to take more forceful stimulus efforts in order to bolster growth during the second half of the year.

In light of potential supportive policies, UBS plans to maintain its growth-tilted barbell approach within Chinese equities. This strategy involves holding policy beneficiary sectors like consumer and internet, as well as defensive sectors for downside protection.

China-focused ETFs have experienced significant losses this year. The iShares MSCI China ETF has fallen by 4.3%, while the Xtrackers Harvest CSI 300 China A-Shares ETF and KraneShares CSI China Internet ETF have both incurred losses of 4% and 5% respectively. Additionally, the Rayliant Quantamental China Equity ETF has faced a significant decline of over 14%, based on FactSet data.

All four funds experienced a decline on Monday after witnessing two consecutive weeks of downward movement.

Jennifer McKeown, chief global economist at Capital Economics, stated in a note on Monday that the global economic and market repercussions resulting from the troubles at Country Garden are expected to be limited. However, she also warned that these issues reflect a structural downturn that will shape the global economy for years to come.

China, as the world's second-largest economy, must contend with demographic challenges due to a declining population. The combination of over-investment and a reluctance to rely on market mechanisms for resource allocation is contributing to a slowdown in productivity growth, according to Capital Economics.

Read: China-focused ETFs fall after country's growth disappoints, deepening 2023 losses