China’s stimulus unleashes a wave of ETF buying in the US and Europe

A scramble for Chinese stocks united the global investment industry last month, just as attitudes toward European and Japanese stock markets became sharply bifurcated along geographic lines.

Despite strong domestic enthusiasm, investors in foreign exchange-traded funds turned their backs on European and Japanese stock markets in September.

However, global investors were unified in their enthusiasm for Chinese stocks after the People’s Bank of China unveiled a series of stimulus measures that included monetary easing, steps to support the country’s crisis-hit housing market and a 800 billion lei to stimulate the stock market, through loans. asset managers, insurers and brokers to buy shares and listed companies to buy back their shares.

The war chest has expanded the activities of China’s “national team” of sovereign funds, notably Central Huijin Investment, which have poured billions of renminbi into domestic equity ETFs over the past 12 months in a bid to boost the onshore A-share market. and rekindle investor confidence.

The CSI 300 index of companies listed in Shanghai and Shenzhen responded by rising 32 percent over two weeks, before falling 7 percent on Wednesday. Despite the rise, the blue-chip index still remains 32% below its February 2021 peak.

Overseas ETF investors played their part, unleashing a buying spree that represented a dramatic turnaround.

In the last four trading days in September, investors pumped $1.6 billion into China-focused U.S.-listed exchange-traded funds, while similar funds listed in Europe pulled in $753 million, data from at TrackInsight.

That was a stark contrast to the pattern seen so far this year: In the nearly nine months to Sept. 24, U.S. investors pulled a net $5.1 billion from China-focused ETFs, while their European counterparts reduced their exposure by $331 million.

New inflows, however, remain dwarfed by domestic flows. China stock ETFs listed in the Asia-Pacific have amassed a net $127 billion so far this year, according to data from BlackRock. The vast majority of these are likely to have come from ETFs listed in China itself, in part due to the machinations of the domestic team.

Despite the turnaround in ETF flows, enthusiasm for Chinese stocks remains subdued in some quarters.

BlackRock Investment Institute moved from neutral to a “modestly overweight” view on China following the stimulus announcement, boosted by the onshore market’s lower valuation of A-shares than developed-market shares.

However, it said it remained “cautious over the long term given China’s structural challenges” and was “ready to pivot” to a more dovish view if deemed necessary.

TrackInsight’s Rony Abboud warned that regulatory risks from both US regulators – in terms of security and audit issues – and their Chinese counterparts – given past crackdowns on big tech – “are still factors majors’ in the minds of many investors.

Moreover, “there is skepticism about the long-term impact of the recent stimulus. While it may alleviate short-term pressures, it is not considered sufficient for a strong recovery without additional fiscal support,” Abboud added.

“Time will tell if the pullback was a brief squeeze or a sustained rally,” said Matthew Bartolini, head of ETF research for the Americas at State Street Global Advisors, given that short-term interest in single-country-focused ETFs on China “was raised” previously. and flows three months ago “the worst they’ve ever entered September”.

Yet any semblance of global consensus was conspicuously absent elsewhere.

European investors remain bullish on their own equity markets, pumping $6.6 billion into ETFs focused on the region in the past three months, according to BlackRock data. By contrast, US investors are unconvinced, with additional selling in September leading to $2.7 billion in three-month outflows from European equity ETFs.

A similar picture emerged in Japan, where Asia-Pacific investors poured $9.3 billion into Tokyo-focused ETFs over the past two months, even as US and European investors withdrew $4.6 billion.

“Japan and Europe have a very strong home bias. International investment in both markets has declined,” said Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the Emea region.

In the case of Japan, Chedid said this is because “the domestic investor is still at the beginning of the journey of buying their own market. They stayed in cash: when Japan was in deflation, they didn’t need to buy stocks,” a development he saw as structural.

In contrast, some foreign investors saw “more headwinds coming from the Bank of Japan (as) it is expected to continue to normalize policy,” cutting the still-ultra-low policy rate a bit further.

Regarding Europe, Chedid said “if you look at the macro (economic) picture that we’ve seen over the last month, European macro is starting to disappoint and US macro is starting to surprise on the upside.

“I think over the last month, that has impacted investor sentiment on Europe a little bit, but the European investor is still buying a lot of European stocks, especially given that the European Central Bank is going to accelerate its rate cuts. ”, something that would be “a tailwind for the European equity market”.

Total monthly flows into the global ETF industry reached $141 billion in September, according to BlackRock, up from $129 billion in August, keeping it on track to break all records this year.

Equity ETFs accounted for $102 billion of these inflows led, as always, by US-focused funds, which took in $57 billion.

Fixed income flows slowed to $34.6 billion, while commodity ETFs attracted $1.7 billion, led by gold funds, which have now seen inflows for five straight months — though they remain further in the territory of net outflows for the year.

Chedid attributed the resurgence of interest in gold among ETF investors to increased geopolitical volatility, alongside a backdrop of falling global interest rates — traditionally helpful for a low-yielding asset.