China ETF Drawing Most Funds Since 2012 on Stimulus Bets

Investors are returning to the largest Chinese exchange-traded fund in the U.S. at the fastest pace in almost two years on signs a government stimulus program will support growth in the world’s second-largest economy.

The iShares China Large-Cap ETF has attracted a net $518 million in August, putting it on track for the biggest monthly inflow since $1.34 billion was added in December 2012. The ETF, which has Tencent Holdings Ltd. and China Mobile Ltd. among its 25 stocks, reached an 18-month high on Aug. 13 after rallying 26 percent from a March low. The Bloomberg China-US Equity Index rose 0.5 percent as of 9:49 a.m. in New York, extending its advance since the end of July to 3 percent.

Investors are speculating that Chinese equities will extend gains as Premier Li Keqiang’s government has promoted railway spending, cut some banks’ reserve requirements and reduced taxes to protect an annual growth goal of about 7.5 percent that’s been under threat from a weakening real estate market. The Hang Seng China Enterprises Index has risen 1.4 percent this year after slumping 5.4 percent in 2013.

“People are getting more constructive on China, on the Chinese government’s smooth recovery plan,” Walter Price, a senior portfolio manager at Allianz Global Investors, which manages $493 billion in assets, said in a phone interview from San Francisco. “The U.S. and European markets are making their new highs, and the China market is very far from its high, so the feeling is that these stocks are going to catch up.”

Housing Slump

The Hong Kong index for Chinese companies trades 46 percent below an October 2007 high, while the Shanghai Composite Index is still 64 percent down from its highest level after gaining 3.8 percent this year. The Standard and Poor’s 500 Index rose to surpass 2,000 for the first time this week and reached a record on Aug. 27.

The Shanghai Composite advanced 1 percent today, while the Hang Seng China index gained 0.3 percent.

Two months of net inflows have helped drive total assets of the iShares China ETF up 24 percent to $5.9 billion.

While China’s economic growth accelerated to 7.5 percent in the three months through June following a two-quarter slowdown, government data showed new credit growth for July plunged to the lowest since October 2008 as industrial output expansion slowed.

The nation’s new-home prices fell last month in almost all cities that the government tracks amid a housing market slump that has become a drag on its economy, prompting the municipalities to start easing local curbs from June. Thirty-six had loosened measures through mid August, according to the Centaline Property Agency.

Detrimental Stimulus

Bank of America Corp.’s David Cui, the No. 1 ranked China strategist by Institutional Investor magazine, said July 14 that the stimulus that’s sparking the rally is actually making equities less appealing as leverage rises and free cash flow dwindles.

Fluctuations in economic growth added to investor concerns about a hard landing earlier this year and fueled a selloff in Chinese stocks, according to Michelle Gibley, director of international research at San Francisco-based Charles Schwab Corp., which has $2.38 trillion in assets.

“The relative stability in the economy in June beat those low expectations and encouraged investors to begin returning to Chinese stocks,” she said by e-mail yesterday. Chinese stocks are likely “benefiting from the prospects of further stimulus, attractive valuations, and excitement about increased availability of yuan-denominated investment opportunities.”

Exchange Link

Chinese Premier Li unveiled in April a plan to link stock exchanges in Shanghai and Hong Kong, which will allow a net 23.5 billion yuan ($3.8 billion) of daily cross-border purchases. When the link starts in October, it’ll give international investors a new route to buy Chinese stocks while helping Hong Kong bolster its status as a gateway to mainland markets.

China Mobile, the world’s largest mobile-phone carrier by users, has surged 28 percent this quarter, the best performance on the iShares China ETF. China Telecom Corp. posted a 26 percent gain since June and Tencent rallied 7 percent. PetroChina Co., the country’s biggest oil producer, has advanced 12 percent in Hong Kong.

“People are looking at the movement in some of these big Chinese stocks, and they are saying ’maybe China is bottoming,’” Allianz’s Price said.

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