Following the recent significant surge in China's stock market, the largest China stock ETF listed in the United States has exceeded $10 billion in size last week. Concurrently, the rise in China's stock market has also driven the overall strong performance of emerging market indices for a period.

After last week's pullback, the majority of foreign investment analysts anticipate that the short-term upward momentum in China's stock market still exists, while the medium term depends on a multitude of factors.

Driving the Overall Performance of Emerging Market Indices

Goldman Sachs stated in a report on October 9th that China's policy measures have provided support to emerging markets, leading to a broad rebound in emerging market stocks. The bank mentioned that until this summer, the broad emerging market stock index had been under long-term pressure. However, with the Federal Reserve entering an easing cycle, the global macro environment has improved.

The report indicated that over the past three weeks, China's performance relative to other emerging markets has been superior to any period in the past 25 years. Specifically, since September 23rd, the EEM, which tracks the MSCI Emerging Markets Index, has significantly outperformed the EMXC, which tracks the MSCI Emerging Markets Index (excluding China). As of October 9th, the MSCI Emerging Markets Index has risen by 11% from its mid-September low, expanding the year-to-date gain to 15%. During the same period, Chinese stocks have surged nearly 40% from their previous lows.

Advertisement

Goldman Sachs' Asia equity strategists have upgraded their rating on the Chinese market to overweight and expect further increases in emerging market stocks. For instance, markets highly sensitive to China's growth, such as South Korea, Malaysia, South Africa, and commodity markets (Peru, Chile), may benefit more directly from China's recovery.

This trend was also reflected in the Asia-Pacific market on October 14th. During the Asia-Pacific trading session on the 14th, the CSI 300 Index rose by 1.3%, while the Japanese stock market was closed for a holiday. The Australian S&P/ASX 200 Index had increased by 0.48% by midday, and the South Korean Kospi Composite Index closed up by 0.95%.

In addition to boosting the overall emerging and Asia-Pacific markets, overseas ETFs have also been affected by the rise in Chinese stocks. According to media data, since September 24th, the largest China stock ETF listed in the United States—the FXI—has continuously attracted net inflows of funds, reaching a size of $10.58 billion as of October 10th. This marks the first time that an ETF tracking Chinese stocks listed in the United States has exceeded $10 billion. Previously, even in 2015, there was no instance of an ETF related to Chinese stocks listed in the United States surpassing $10 billion in size. The FXI is issued by BlackRock's ETF brand iShares and tracks the FTSE China 50 Index, with the top ten holdings including Meituan, Alibaba, Tencent Holdings, JD.com, Xiaomi Group, Ping An Insurance, BYD, Bank of China, and Industrial and Commercial Bank of China, among others. Apart from the FXI, other large China stock ETFs listed in the United States—such as the KWEB tracking the China Internet Index, the MCHI tracking the MSCI China Index, the ASHR tracking the CSI 300 Index, and the YINN which is three times long on the FTSE China 50 Index—also reached sizes of $7.42 billion, $6.25 billion, $2.96 billion, and $2.48 billion, respectively, as of October 10th.

While ETFs tracking Chinese stocks continue to record inflows of funds, other cross-border ETFs that do not invest in the A-share market and some ETFs tracking overseas indices have experienced varying degrees of redemptions due to the "suction effect" of China's stock market. According to Wind statistics, from September 24th to October 9th, the total redemption volume of 38 cross-border ETFs tracking major indices of overseas markets such as the United States (excluding Chinese concept stock ETFs and Hong Kong stock ETFs) reached 1.893 billion shares, with an overall redemption ratio of 2.33%. Some ETFs tracking the United States, Japan, France, and the Asia-Pacific market have seen redemption ratios of 10% to 20% within just a few days.

Continued Upward Momentum?Regarding whether Chinese stocks will continue to show a recent market trend of rising and then falling, most market insiders interviewed by First Financial Daily hold a cautiously optimistic attitude.

Nicholas Chui, China Equity Fund Manager at Franklin Templeton's Emerging Markets Equity Team, told First Financial Daily that the US interest rate cut cycle has narrowed the China-US interest rate differential, providing a policy easing window for the Chinese government. This has also eased the pressure on the yuan, allowing it to still have room for appreciation, which can also benefit emerging markets as a whole. "In addition, the policy announced on September 24th has a direct positive impact on A-shares. The adjustment of the reserve requirement ratio and the magnitude of the interest rate cut exceeded expectations, reflecting the Chinese government's willingness to address broader macroeconomic pressures. We expect that these recent policy measures will be the beginning of more to come, not the end. If so, this will help the recovery of the Chinese economy, thereby providing support for corporate and industry profits."

Meng Lei, China Equity Strategy Analyst at UBS Securities, analyzed to First Financial Daily that there is still upward momentum in A-shares in the short term, and mid-term market growth requires support from corporate earnings. "The upward momentum brought about by policy easing still exists in the short term, but the market's upward slope may gradually slow down, and the amplitude of two-way fluctuations will increase. From a policy perspective, policy support, including real estate, monetary, and capital market policies, is in the process of gradual implementation, and fiscal policy details are yet to be announced, so the momentum of market sentiment repair brought about by policy easing still exists. From a liquidity perspective, a large amount of funds outside the market (including new individual investors, newly issued public funds, foreign capital that was previously underweight in the Chinese stock market, and long-term funds that have not yet entered the market) are waiting to enter. If A-shares retract, funds that missed the previous market rebound may take the opportunity to increase their positions, thereby limiting the potential market回调 amplitude."

He said, "Of course, most investors also realize that after A-shares have experienced the first round of strong rebound driven by policy easing and sentiment repair, market valuations have reached historical average levels, and the market's upward slope will eventually slow down. Some short-term investors who entered the market before may choose to take profits, increasing the two-way fluctuation amplitude of the market. In our view, whether A-shares can continue to achieve a sustainable second round of upward trend depends on the strength of fiscal and other related policies in the future."

He added, "Looking at the mid-term from a half-year perspective, the market's continued upward movement requires support from corporate earnings. In the first half of 2024, the overall earnings of listed companies in A-shares declined by 3% year-on-year. Industrial enterprise profits in July and August grew by 4.1% and ~17.8% year-on-year, respectively, showing that corporate earnings in the second half of the year are still consolidating at the bottom. The policy easing that has been implemented since late September and its transmission to the real economy and corporate earnings require a certain amount of time. If the economic fundamentals gradually improve and profits ride the momentum, the upward space for A-shares may be further opened up. He expects Chinese families to continue to increase their stock allocation exposure, saying "In the long run, A-shares are the best reservoir for family wealth, and China also needs a new engine that can create wealth effects." However, he also believes that A-shares are unlikely to replicate the ups and downs of 2015, as监管部门 seem to be more cautious about leveraged funds at present, and the deepening of institutionalization in the past few years has helped to smooth potential excessive market fluctuations.

Ma Lei, Chief Investment Director of Invesco's Mainland China and Hong Kong regions, also told First Financial Daily that the recent economic stimulus measures announced by the Chinese government have boosted market sentiment to be optimistic. The remarks of the National Development and Reform Commission, combined with the supportive monetary and fiscal policies announced recently, will boost the Chinese economy. Against this backdrop, Invesco is actively optimistic about the long-term prospects of the Chinese stock market. Regarding specific investment themes, he said that Invesco will continue to focus on the four major themes in the Chinese economic pattern, including Chinese enterprises going global (Go Global), green transformation (Go Green), artificial intelligence technology advancement (Go AI/IT), and Chinese enterprises with dividend growth (Go Dividend Growth).

Xiong Yi, Chief Economist of Deutsche Bank's China region, also holds a similar view. He told First Financial Daily that there are three main reasons why China's incremental policies in this round are different from the past: First, the scale and intensity are unprecedented and timely; second, the policy effect increases the support for asset prices to boost market sentiment; third, it is clear that further efforts will be made when necessary. In addition, he said that China's incremental policies are also in line with the recent shift of the Federal Reserve to a loose cycle. "The synchronization of internal and external factors makes the favorable global market environment a key point different from previous periods, which helps China to accelerate the implementation of various economic stimulus measures while maintaining financial stability."

Bi Kai, manager of BlackRock's Excellence Far-sailing Mixed Fund, analyzed from a technical level to First Financial Daily that the stock market has recently risen rapidly under the promotion of a series of pro-economy policies, and trading volume has surged. Looking forward to the next 2-3 months, it is expected that the market will enter a stage of observing the trend of improvement in economic fundamentals. If there is a significant improvement in economic fundamentals, the index still has room for further upward movement. On the contrary, if the economic fundamentals do not effectively respond to policies, policies need to further exert force for support, otherwise, the index will face certain adjustment pressure. However, he emphasized that unlike the situation in the first half of 2024, this round of upward movement has strong policy target support, and policies still have room for maneuver, so the possibility of the market rapidly moving downward in the short term is also not great.