In a response to the downturn in the local stock market, an unprecedented amount of Chinese funds is pouring into overseas equities, signaling a growing disillusionment among investors with domestic opportunities.
In January, inflows into 33 onshore exchange-traded funds (ETFs) tracking foreign benchmarks, excluding Hong Kong, surged to $2 billion, marking the highest monthly figure in Bloomberg data since late 2020. Over half of this capital found its way into US stocks, particularly as the S&P 500 reached new highs, while an additional $204 million flowed into Japanese markets.
This surge in enthusiasm has led to significant distortions within the domestic ETF market. Prices have, in some instances, skyrocketed to 40% above the value of underlying assets, introducing extreme volatility and frequent trading halts. Despite these risks, investors remain undeterred. China’s capital controls make these products highly sought after as a primary avenue for retail investors to access overseas markets while local stocks continue their losing streak.
This capital flow is part of a broader trend away from China as domestic investors lose confidence in the local share market. January marked the sixth consecutive month of global funds’ exodus, totaling another 14.5 billion yuan ($2 billion).
Despite occasional stock gains driven by stimulus hopes, optimism is short-lived as weak economic data dampens the outlook. The CSI 300 Index has plummeted to a five-year low, losing over 7% this year alone. Contrastingly, overseas markets experience robust runs, fueled by strong corporate earnings and optimism about a soft landing in the US economy. Japanese benchmarks hover near three-decade highs as the economy emerges from a deflationary spiral.
The in-demand ETFs are part of China’s qualified domestic institutional investor program, allowing certain fund houses to buy foreign securities within a designated quota. The limited pool has caused ETF prices to surge beyond the underlying asset’s value, exposing investors to potential losses if overseas markets undergo a sudden correction or if the premium dissipates.
Notably, Invesco Great Wall Fund Management’s ETF tracking the Nasdaq 100 attracted the highest inflow last month at $513 million, gaining over 8% during the period while the US tech gauge advanced less than 2%. The Huatai-PineBridge CSOP iEdge Southeast Asia+ TECH Index ETF also drew substantial attention, pulling in $426 million.
While premiums have somewhat eased from extreme levels in January following warnings from issuers and purchase restrictions, demand remains robust, especially for new products yet to face such limitations. China Universal Asset Management Co.’s fund tracking the MSCI USA 50 Index, for instance, reached its 220 million yuan target in a single day, with fundraising originally planned to last until late March.
In an effort to curb enthusiasm, 20 ETFs tracking foreign stocks or mutual funds directly investing in them introduced a cap on daily subscriptions this year, as revealed in exchange filings.
