China Stock Funds Outperform US Funds In South Korea

Chinese stocks are attracting South Korean investors looking beyond Wall Street amid the downturn in US Big Tech stocks.

South Korea’s equity funds tracking Chinese stocks have seen a net inflow of 214.4 billion won ($148 million) in the past one month, reversing prolonged outflows in what had been dubbed a “China fund run,” according to financial industry sources on Wednesday.

The 185 China stock funds, launched in South Korea, recorded an average six-month return of 43.56% as of March 12, according to industry tracker FnGuide data.

They significantly outperformed other equity funds, including Korean stock funds (1.6%), as well as overseas funds for the US stocks (13.08%), Japan (6.61%), Vietnam (4.37%) and India (-9.61%), over the same period.

Leading the gains in China stock markets are technology companies buoyed by the release of DeepSeek, the Chinese counterpart to generative AI ChatGPT, which analysts said highlights the country’s technology reaching globally competitive levels.

Over the past six months, the Hang Seng Index (HSI) has climbed 45%, fanned by the Chinese government’s sweeping economy stimulus plans announced in September last year.

China’s so-called Terrific 10 – a group of tech giants likened to the Magnificent 7 on Wall Street – have posted double-digit gains year-to-date.

The 10 stocks include Semiconductor Manufacturing International Corp. (SMIC), Xiaomi, Alibaba, Tencent, and BYD. SMIC, China’s largest contract chipmaker, has shot up 62.14% so far this year, followed by Xiaomi's 56.23% rise.

“China’s competitiveness in electric vehicles and autonomous driving are reaching world-class levels," said Park Yeon-joo, an analyst at Mirae Asset Securities, who recently toured Chinese EV makers. “Tesla’s weak earnings are bringing attention to the valuation appeal of Chinese automakers.”

TRADING VOLUME

Last month, South Korean investors’ trading in Greater China stocks, including equity funds, soared 179% to $782 million from the previous month by volume. That marked the highest level in two and a half years, since August 2022.

EQUITY-LINKED PRODUCTS REBOUND

The rally in Chinese stocks brought a sigh of relief to investors of equity-linked securities (ELS) tracking the Hang Seng Index.

Between late 2023 and early 2024, these investors were panicked by heavy losses from the derivative products as the Hong Kong stock market nosedived.

ELS funds tied to the HSI have wiped out an average of 53% of their value as of the first half of last year, compared to the 2021 peak.

Reversing the trend, the HSI-linked ELS funds maturing this year have, as of Tuesday's market close, reached the levels required to generate returns, according to the Korea Securities Depository on Wednesday. They were marketed in 2022.

Yuanta Securities Co., estimates that 315.2 billion won worth of the HSI-tied ELS products are coming due this year.

If the Hong Kong stock index remains at current levels, the derivative products are expected to deliver their promised returns.

MONEY INFLOWS

In the first two months of this year, ELS linked to the Hong Kong stock index attracted 225.8 billion won, nearly four times the 57.9 billion won inflows during the same period of last year.

For all of 2024, money inflows to the funds shrank to 975.5 billion won, less than one-fifth of 5.39 trillion won recorded in 2023.

The value of ELS funds launched in the country dwindled to 51.60 trillion won in 2024, versus 67.14 trillion won the year prior.

An ELS is a type of fixed-income derivative that pays out a return based on the performance of a basket of stocks or stock indices.