Inside the Recent China A Shares ETF Slump

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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.

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?).

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.

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