‘China’s economy is not doing well, despite the government’s stimulative efforts,’ says Yardeni Research.
Chinese markets fell sharply Thursday, with exchange-traded funds that track Chinese stocks falling sharply over fears about the world’s second largest economy.
According to FactSet data, the iShares MSCI China ETF MCHI, which manages $8 billion in assets, closed 3% lower on Thursday. With $6 billion in assets, the KraneShares CSI China Internet ETF KWEB declined 4.2%.
“China’s economy is not doing well despite the government’s stimulative efforts and the default-avoidance efforts of its largest property developer,” Yardeni Research wrote in a note Thursday. “We’ve long believed that the government will eventually have to sponsor a debt restructuring program if it hopes to put China’s leverage problems behind it any time soon.”
ETFs focused on Chinese stocks have outperformed US and global markets this year, with the iShares MSCI China ETF down 7.4% through Thursday, according to FactSet data. Meanwhile, the iShares MSCI ACWI ETF ACWI, which follows companies in developing and emerging markets, has increased by 12.3% this year, while the S&P 500 SPX has increased by 15.9%.
The iShares MSCI China ETF, which tracks a Chinese stock index, has underperformed in recent years. According to FactSet data, the fund fell more than 24% in 2022 after falling more than 22% in 2021.
Meanwhile, the Xtrackers CSI 300 China A-Shares ETF ASHR, which manages approximately $2 billion in assets, closed 2.4% lower on Thursday, according to FactSet data. This year, the fund has decreased 7.7%.
On Thursday, other smaller ETFs focused on Chinese companies fell as well.
According to FactSet data, the Invesco Golden Dragon China ETF PGJ, which manages approximately $183 million in assets, finished down 3.9%, while the Rayliant Quantamental China Equity ETF RAYC, which manages approximately $85 million, down 2.5%.
Yardeni noted that the forward price-to-earnings ratio for the China MSCI stock price index has lately decreased to 10 from a top of 18.3 in February 2021.
“The index’s valuations have fallen into the single digits during times of extreme stress in the past, and unless the Chinese government works proactively to reduce leverage in its economy, more distressed valuations may be coming,” the firm warned in its note.
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