Chinese investors are extremely eager to invest in overseas stocks. This is a result of the long-standing slump in mainland stocks, but it has caused significant distortions in the prices of funds that track foreign stocks.
Chinese traders are willing to pay up to 40% more than the value of the underlying assets for some exchange-traded funds (ETFs) to gain exposure to foreign stocks. As a result, trading has been suspended or purchase restrictions have been imposed on many ETFs.
With the U.S. S&P 500 stock index reaching a new all-time high and Japan’s stock index also recovering to levels seen decades ago, it’s easy to imagine why Chinese investors are becoming more willing to buy. However, the premiums on ETFs tracking foreign stocks could shrink significantly, raising the risk that investors could end up in the same position as the losses they were trying to avoid domestically.
Li Minghong, portfolio manager at Beijing Ikun Asset Management, which manages funds of funds, said, “Capital chases profits.Now that mainland stocks are in such a slump,” investors are turning to other markets. He pointed out that it is “natural” to seek exposure. “Not only individual investors but also institutional investors are investing in these ETFs,” he said.
The premium for “E Fund MSCI USA 50 ETF QDII” rapidly increased to a record high of over 40% last week due to a rush of traders. The premium for similar products linked to the Nikkei average exceeded 20%.
Due to capital controls, mainland retail investors have few avenues to buy overseas stocks, and Qualified Domestic Institutional Investor (QDII) program ETFs and related mutual funds are among the most popular investment channels for retail traders. It is one. Under the QDII program, institutional investors who meet certain conditions can invest in foreign securities within a certain amount of time.
For ETFs, the premium increases rapidly when the fund price exceeds the value of the underlying assets due to active purchases by investors. Unlike other markets, QDII’s ETF premiums tend to last for a long time because there is no market maker (price maker) and there is a high possibility that aggressive purchases will quickly exhaust the funds available to fund managers. .
According to Bloomberg Intelligence (BI), the average trading premium for 31 QDII ETFs as of last week was 3%. Last year it was 1%.
Some Chinese investors who have lost confidence in the mainland stock market say, “If you are entrusting the fate of the nation to the Nasdaq.”sloganIt is even listed. Net inflows into China-listed ETFs with external exposure excluding Taiwan and Hong Kong reached $1.3 billion this year, according to BI data.
BI analyst Rebecca Shin said, “Chinese retail investors who are avoiding underperforming mainland equity ETFs and pursuing ETFs that own U.S. stocks, which are trading at record highs and premiums, are “There is a risk of severe damage,” he warned. “If the U.S. stock market falls, we will be burned twice,” he said.
Original title:Chinese Fervor for Overseas Equities Is Breaking ETF Trading (excerpt)
2024-01-30 01:02:07
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