Chinese equities took a significant hit on Thursday as concerns over the country's economy, the world's second largest, weighed heavily on investors' minds. Exchange-traded funds (ETFs) focused on Chinese stocks saw notable drops in their value.
The iShares MSCI China ETF (MCHI), managing $8 billion worth of assets, witnessed a decline of 2.8% around midday on Thursday, according to FactSet data. Similarly, the KraneShares CSI China Internet ETF (KWEB), with $6 billion of assets, fell 3.8%.
Yardeni Research noted, "China's economy is not faring well despite the government's efforts to provide stimulus and the largest property developer's attempts to prevent default. It is our belief that the government will ultimately need to initiate a debt restructuring program if it wants to resolve China's significant leverage issues in the near future."
Comparatively, Chinese-focused ETFs have significantly underperformed U.S. and global equities this year. The iShares MSCI China ETF has experienced a decrease of more than 7%, as per FactSet data, while the iShares MSCI ACWI ETF (tracking stocks in developed and emerging markets) has surged 12% this year. Meanwhile, the S&P 500 has enjoyed a remarkable increase of approximately 16%.
The Struggle of Chinese ETFs
The iShares MSCI China ETF, which tracks an index of Chinese shares, has faced significant challenges in recent years. According to Factset data, the fund experienced a sharp decline of over 24% in 2022, following a drop of more than 22% in 2021.
Deteriorating Sentiment Hits China's Yuan
China's yuan is also facing downward pressure, heading towards multiyear lows against the dollar. This decline in sentiment adds to the challenges faced by the iShares MSCI China ETF.
Another ETF, the Xtrackers CSI 300 China A-Shares ETF (ASHR), managing around $2 billion in assets, saw a midday decline of 2.3% on Thursday, according to FactSet data. So far this year, the fund has dropped more than 7%.
Slumping Chinese ETFs
Not only are larger ETFs struggling, but smaller ones focused on Chinese stocks are also facing downturns. For instance, the Invesco Golden Dragon China ETF (PGJ) with approximately $183 million in assets experienced a midday decline of 3.9%, while the Rayliant Quantamental China Equity ETF (RAYC), managing about $85 million, was down 2.4%, according to FactSet data.
Uncertain Future for China MSCI Stock Price Index
The Yardeni firm suggests that the China MSCI stock price index is experiencing a significant decline in its forward price-to-earnings ratio. From a peak of 18.3 in February 2021, the ratio has fallen to 10. The firm warns that unless the Chinese government actively addresses the issue of leverage in its economy, the index may face even more distressed valuations in the future.
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