Major exchange-traded funds (ETFs) targeting Chinese stocks experienced a decline on Monday following China’s announcement of disappointing growth in the second quarter. This news has further contributed to the downward trend of these ETFs this year.
At last check, the iShares MSCI China ETF (MCHI) reported a 0.8% decrease, while the KraneShares CSI China Internet ETF (KWEB) and the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) fell by 0.6%, according to FactSet data.
China’s economy recorded a growth rate of 6.3% in the second quarter, which fell short of expectations. Earlier this year, investors held optimism that the gradual reopening of China, the world’s second-largest economy, would bolster its growth after strict COVID-19-related measures.
Jonas Goltermann, deputy chief markets economist at Capital Economics, highlighted the challenges facing China’s equity market in a note on Monday. He cited concerns over US-China tensions, the struggling property market, which is a significant contributor to Chinese growth, and regulatory uncertainties surrounding the “common prosperity” agenda. These factors raise concerns about the future prospects of Chinese equities, though they appear to be already factored into current pricing.
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China’s Growth Concerns Weigh on Market Sentiment
The latest data on China’s second-quarter growth has confirmed market fears over the challenges it is facing, resulting in a faltering post-lockdown rebound. Although not a major surprise, these findings shed light on longstanding headwinds for the Chinese economy.
So far this year, several China-focused ETFs have experienced a decline in value. The iShares MSCI China ETF has dropped by 2.6%, the KraneShares CSI China Internet ETF has slid 3.7%, and the Xtrackers Harvest CSI 300 China A-Shares ETF has fallen 2.4%, according to FactSet data from Monday afternoon trading.
A significant factor contributing to the poor performance of China’s equity market is the downward trend of earnings per share over the past decade. This decline has also contributed to the country’s low valuation.
MSCI’s China Index has experienced a decline of over 15% since its peak in late January, while stock markets in other parts of the world continue to thrive. This widening gap between the China Index and the global All-Country World Index can be attributed to China’s departure from the ‘zero-COVID’ approach adopted last autumn.
In contrast, the iShares MSCI ACWI ETF, which invests globally in stocks across developed and emerging markets, has recorded a positive gain of more than 15% this year, according to FactSet data.
While China’s performance has dampened global market sentiment, US stocks have managed to shrug off early weakness. The Dow Jones Industrial Average is up around 85 points, or 0.2%, and the S&P 500 has risen 0.3% at last check.