To The Moon

Summary

• China's government takes action to save property and stocks, leading to a bounce in struggling share prices.
• Investment managers are rushing back to China as fund launches reach a record high, capitalizing on the weak yuan.
• The iShares China Large-Cap ETF is outperforming the S&P 500, offering potential currency gains and exposure to consumer revival.

EschCollection

China's government has been stubborn in its refusal to offer large stimulus measures to arrest the country's economic decline. This has ended in 2024 with some "historic" changes. Investment managers are flooding back to China, and the recent plunge in the country's currency has made the opportunity more enticing.

China's government steps in to save property and stocks

An expected economic rebound in China did not materialize in 2023 and after capital flooded into the country in January, it began to reverse by the end of the year. Foreign direct investment (FDI) to China had also reached decades-lows by February this year. After reaching a peak of $344 billion in 2020, the country could only muster FDI of $33 billion in 2023.

But February was the month that the trend started to reverse. China's government, which had been stubborn to answer the market's call for stimulus to shore up the property market, began to take action on rates.

New measures by authorities to boost the stock also led to a bounce in struggling share prices. The measures included new restrictions on securities lending and short selling, while state funds vowed to step up stock investments, seeking to reverse a $2 trillion loss in market cap from a 2021 peak.

The Chinese government followed up with "historic steps" to stabilize the property sector, which had been a drag on consumer spending.

Fund managers rush back to China, with inflows reversing

Recent data has shown global fund launches in China reaching a record high as fund managers look to capitalize on the weak yuan. Eleven funds have been launched under the Qualified Domestic Limited Partner (QDLP) program this year, which is already higher than any previous year.

Fund management heavyweights including Blackstone (BX), Bridgewater Associates, and Oaktree Capital have opened funds in the country this year. With the Chinese yuan trading at six-month lows and sentiment changing positively, managers are rushing to launch funds and invest. Blackstone launched its first QDLP fund in April and met its fund-raising target in two weeks

Bloomberg reported in mid-May that investors have been flooding back to China, with the country seeing the highest inflows of emerging market economies in the week ending May 17 at $488 million. Total inflows into emerging market ETFs this year have been $6.8 billion, they added.

Inflows have been reversing in Chinese equities after an August 2023 rush of outflows peaked at 218 billion yuan ($30.2 billion) in January of this year. The trend started to reverse in February as stimulus measures started and around 100 billion yuan had returned. Domestic investors have also supported a bounce in Chinese stocks, with total inflows to Hong-Kong-listed stocks hitting $28.5 billion this year.

Chinese Stock Market (Bloomberg)

An investment with added currency upside

The most popular China-focused ETF for U.S. investors is the iShares China Large-Cap ETF (NYSEARCA:FXI) which has around $5 billion in assets. The fund is outperforming the S&P 500 this year with a return of 15% in 2024. The fund has a 3% annual yield from dividends and interest.

The fund has a 10% holding in the Tencent Holdings conglomerate, which is a diversified bet. There is a large 8.5% stake in Alibaba (BABA) and 3.84% in JD.com (JD), meaning the ETF can benefit from a consumer revival. A collective holding of around 16.5% in three of the country's largest can also position investors for a resurgence in capital flows and business activity.

With the Chinese yuan bouncing from six-month lows last week, there is also additional upside from currency gains. The yuan can benefit from a resurgence in foreign investment, and will also find favor when the Federal Reserve begins to cut interest rates.

Economic outlook and risks of buying China

Stimulus measures helped industrial profits rise 4.0% in April from a year earlier, according to the National Bureau of Statistics. That was up from a 3.5% drop in March. The indicator was up 4.3% for the first four months of the year, after a 2.3% drop for the full year of 2023. That is an early sign of business confidence in the country.

U.S. investment banks had recently raised their full-year GDP figure in the country to 5%, which was followed by the IMF raising their target to the same level. Manufacturing is also above expansion levels and could also get a boost from the stimulus this month.

Consumers will be a key factor, with confidence still below pre-pandemic levels. Chinese consumers have become more cost-conscious, but a shift towards working from home and satellite offices has changed consumer behaviour. Many are now supporting local brands and favoring home deliveries, which can boost China-focused companies such as Alibaba and JD.COM.

The country's economy has begun to show signs of recovery, but there is always a risk that property sector problems continue.

"The biggest problem is whether the government purchase program will induce private sector demand. Clearing inventory will increase cashflow to developers and help their financial stability, but it does not address private sector confidence," Raymond Yeung, chief Greater China economist at ANZ, told Reuters.

The other big risk is tensions between China and the United States. U.S. lawmakers met with Taiwan's new leader recently, and that led to the rare step of China calling for an end to U.S. delegations visiting the country. Any escalation in tensions could see a reversal in outflows from China-focused ETFs by fund managers.

Conclusion

China's economic malaise in 2023 had investors running for the exit door. Huge inflows in January of that year had reversed by the end of the year as the property sector continued to weigh on businesses and investors. The Chinese government finally took tough action this year, and that has led to a bounce in stocks and investment flows. The measures could also start to arrest a sharp decline in foreign investment. With the yuan trading at depressed levels, I believe this is a great time to jump on the Chinese economic rebound. This investment could pay off handsomely if economic and diplomatic outcomes remain favorable.