Inside the Recent China A Shares ETF Slump

0
Inside the Recent China A Shares ETF Slump
MaoNo / Pixabay

Emerging markets are currently going through a roller coaster ride in the wake of several factors plaguing these nations. Though an over reliance on cheap foreign capital is certainly an issue which has caused currencies to falter, internal causes such as a lack of structural reforms, poor corporate governance, fiscal and current account deficits and political uncertainty are also some of the key causes of concern.

Play Quizzes 4

Moreover, signs of slowdown in the most important emerging market nation, China, are adding to the list of woes. Recently, Chinese shares crumbled after the government announced harsher-than-expected measures to curb the surge in property prices (read: Emerging Market ETFs: Any Bright Spots?).

London Value Investor Conference 2022: Chris Hohn On Making Money And Saving The World

business activist 1653311320Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More

Consequently, Chinese A shares, which track stocks listed on the Shanghai or Shenzhen exchanges, have seen some rough trading in the last few days. Though only Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors have access to these shares, global investors can access these markets via the ETF route (read: China A-Shares ETFs Explained).

The New Law

The Chinese government has increased the down payment as well as the loan rates for buyers of second homes. The new law is currently applicable for cities witnessing rapidly rising property prices.

This new measure is sending jitters across the market, as reduced lending to the real estate industry is expected to have a ripple effect on the other sectors of the Chinese economy. The measure is thus expected to limit corporate earnings and dampen Chinese growth.

The law comes close on the heels of stricter regulations for shadow bank lending imposed by the government toward the beginning of the year. The law seeks to curb increasing defaults in the shadow banking sector – a system which operates outside the regulated financial market. These regulations have been the major factors affecting the country’s property and banking sectors (read: Inside the Struggling China A-Shares ETFs).

Market Impact

In this backdrop, all major China-A shares ETFs were impacted by property market issues. While PowerShares China A-Share Portfolio ((CHNAETF report)) is down 3.9% in the last one month, db X-trackers Harvest CSI 300 China A-Shares Fund (ASHRETF report) and Market Vectors China ETF ((PEKETF report)) are both down over 1% each.

Moreover, these ETFs are still trading in the red since the start of the year. CHNA is down 6.8%, while ASHR and PEK are down 9.5% and 11.7% respectively.

Not only were the A-shares impacted, the turbulence in the Chinese markets has hit other China ETFs as well. Large cap ETFs like iShares China Large Cap ETF ((FXIETF report)) and iShares FTSE China ETF (FCHI) are each down around 8% each since the beginning of the year (see all the Asia-Pacific Emerging ETFs here).

Bottom Line

Thanks to slowdown concerns, property market bubble crises and debt issues, the Chinese markets have been seeing a difficult 2014. Though the new property law is certainly making investors nervous, China is poised for its first domestic bond default.

A small Chinese company, Shanghai Chaori Solar Energy Science and Technology Company, is likely to default on its annual interest payment due tomorrow.

This further highlights the lurking debt problems in China. While China managed to avert a possible default for a ‘riskless’ investment product ahead of its new year, the fate of Shanghai Chaori remains to be seen. In the shadow of these concerns, the Chinese A shares ETF might continue to see more losses going forward.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Updated on

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were audited and attested by Baker Tilly, an independent accounting firm.
Previous article Facebook Announces Plans To Build ‘Ikea-Style’ Data Center
Next article Fannie Mae, Freddie Mac: Future May Lie With Congress, Not Courts

No posts to display