Investors Surge into China-Focused ETFs Following Beijing Stimulus

In a surprising turn of events, U.S.-based exchange-traded funds (ETFs) focused on Chinese markets experienced a massive influx of $5.2 billion in new assets in the past week, despite mainland China's financial markets being closed for a national holiday. The sudden rush of capital came in response to recent stimulus measures from Beijing, sparking optimism among asset managers that investor confidence in Chinese markets could endure.
The surge in investor interest follows an initial wave of stimulus policies announced by the Chinese government in late September, including interest rate cuts and adjustments to bank liquidity requirements. This culminated in a dramatic stock market rally on September 30, which marked the largest one-day surge in Chinese stocks since 2008.

Renewed Optimism and Investor Inflows
As Chinese markets reopen after a week of holidays, investors and market participants are eager to see further details on how China’s top economic planning agency plans to implement additional measures to promote economic growth. There is optimism that the recent momentum will sustain, reversing the outflows that plagued Chinese-focused ETFs throughout most of 2024.
"The market has been waiting for a credible commitment from China to get its economy going again," said Michael Reynolds, Vice President of Investment Strategy at Glenmede Trust. "Now we need to see follow-through."
Indeed, the influx of $5.2 billion into U.S.-based ETFs contrasts sharply with the average weekly outflow of $83 million earlier this year and a $27 million weekly outflow in 2023, according to data from Morningstar. This suggests a renewed faith in Chinese markets after a period of caution, with investors responding favorably to signs of government action.

The Role of Domestic Investment and ETF Growth
The Chinese government’s focus on bolstering domestic ETFs has also contributed to the positive market sentiment. China's Securities Regulatory Commission recently announced plans to approve new ETFs linked to the "Star Market" segment of the Shanghai Stock Exchange, which focuses on technology companies. This move is aimed at driving more domestic capital into Chinese ETFs and supporting the country’s economic recovery.
Jonathan Krane, CEO of KraneShares, highlighted the impact of this government support on market sentiment. His firm’s flagship ETF, KraneShares CSI China Internet, attracted $1.39 billion in new assets last week alone, reversing year-to-date outflows and pushing its total assets to $8.3 billion.
"The China markets have been so oversold," Krane said. "This is just a very small percentage of the world getting back in or saying I need to rethink China. This was just the early money."
The strong performance of Chinese-focused ETFs has been impressive, with more than two dozen such funds posting one-week returns between 10% and 28%. These gains outperformed the broader U.S. ETF market last week, according to Paris-based data analytics firm TrackInsight.

Broad-Based Exposure and Investor Sentiment
The vast majority of inflows have targeted the largest ETFs offering broad exposure to Chinese large-cap stocks. For example, BlackRock's iShares China Large-Cap ETF, which manages $7.99 billion, saw an impressive $2.7 billion in inflows last week. This highlights how investors, during periods of significant market movement, often seek out index-linked products that offer diversified exposure to multiple sectors and large-cap companies.
"When you see moves that are so vast and violent, you see money flow into these (index-linked) products first," noted Michael Barrer, head of ETF capital markets for Matthews Asia. His firm’s Matthews China Active ETF, a smaller $44.8 million fund, also experienced strong inflows of $11.7 million last week.
Despite the positive investor response, there are still concerns about the sustainability of these inflows. Many market watchers believe that for Chinese-focused ETFs to maintain their momentum, Beijing will need to follow up with a more detailed and high-impact stimulus package. Jason Hsu, CEO of Rayliant Global Advisors, emphasized the need for further action from Chinese policymakers: "The next bazooka that Beijing fires has to come in the shape of formalizing new stimulus proposals and adding a timeline."

Looking Ahead: A Changing Tide for China Investments
The recent uptick in Chinese market activity has led some in the industry to believe that investor sentiment toward China is beginning to shift. Dave Mazza, CEO of Roundhill Investments, pointed to the growing interest in Chinese technology companies as a sign of change. His firm’s Roundhill China Dragons ETF, launched just last week, attracted $35 million in net inflows in its first two days of trading.
"We figured that at some point soon, the tide would turn and China once again would be investable," Mazza said.
As Chinese policymakers continue to navigate the complexities of economic recovery, the future of Chinese-focused ETFs remains inextricably tied to Beijing’s actions. However, the significant inflows and the strong performance of these funds suggest that many investors believe China’s markets may be on the verge of a sustained rebound. If the government follows through with more robust stimulus measures, the inflow of capital could be just the beginning of a renewed era of investment in China.