Traders flee China ETFs at record pace amid headwinds

INVESTORS are offloading their holdings of Chinese technology shares at a record pace as worries over higher inflation coupled with dimming growth prospects hurt outlook for the sector.

The KraneShares CSI China Internet ETF has seen outflows of almost US$700 million this month, Bloomberg data showed, on track to be the worst month for the US-traded fund. Similarly, the CSOP Hang Seng Tech Index ETF in Hong Kong is on track for the smallest monthly inflow since April 2021, which was the last time traders pulled money out of the fund.

Investors are bailing out even after tech stocks surged from their March lows, and China’s biggest companies in the industry reported better-than-feared second-quarter earnings – which many analysts marked as the low point following Covid lockdowns. News in the past week that Chinese regulators are progressing in talks with their American counterparts to avoid US delistings will do little to turn around sentiment, some investors said. 

If the audit spat gets resolved, there is still a “laundry list of issues that have undermined investor sentiment towards China stocks – so this would be resolution of only one of those issues”, said Chetan Seth, Asia-Pacific equity strategist at Nomura Holdings.

While the Nasdaq Golden Dragon Index and the Hang Seng Tech Index have surged from their March lows, that has barely put a dent in the epic rout that started some 18 months ago after Beijing’s regulatory crackdown escalated. The outflows in August took place despite vows by regulators to boost support for the economy through various stimulus measures.

“We would be looking at the following inflection points, including an improving China macro, policy and regulatory backdrop that would boost sentiment around China,” said Pruksa Iamthongthong, senior investment director of Asian equities at Abrdn, which remains underweight on the sector.

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There is also the problem of catalysts. Even when the economy recovers, investors have already changed their valuation models and thinking when it comes to Chinese tech firms. The regulatory crackdown caused firms to downsize and trim non-core businesses, which has stemmed growth after years of unfettered expansion.

Alibaba Group Holding’s Hong Kong shares, for example, are trading at about 12.5 times its estimated earnings for the next year. That is even cheaper than utility firm CLP Holdings’ 15.7 times and Hong Kong & China Gas’ 20 times multiples, Bloomberg data showed. 

“The market is valuing this sector differently,” said Jessica Tea, senior investment specialist for Greater China equities at BNP Paribas Asset Management. “Some of those participants in this sector are becoming more mature, so we think that this sector’s golden age is probably over.” BLOOMBERG