China ETFs Swell as Investors Weigh Fed Timing, MSCI Inclusionby
Mainland, Hong Kong-focused funds post $387 million inflow
MSCI to announce whether it will include China stocks Tuesday
Investors are returning to exchange-traded funds focused on China and Hong Kong as increasing odds that the Federal Reserve will move slowly in raising U.S. interest rates stoked demand and traders braced for MSCI Inc.’s decision about whether to add mainland stocks to its benchmark indexes.
ETFs that invest in equity and debt securities traded on mainland exchanges and in Hong Kong posted inflows of $387 million last week, the most since March, data compiled by Bloomberg show. The iShares China Large-Cap ETF, which owns the country’s 50 largest companies by market value, grew for the first time this year as short interest declined from a 2014 high.
Money is flowing back into China after foreign investors pulled out earlier this year amid concern that the slowdown in the world’s second-largest economy is worsening and as the prospects for higher Federal Reserve interest rates damped demand for riskier assets. Fed futures traders now see no chance of an increase this month and less than 16 percent odds of a move in July after slower-than-forecast jobs growth weakened the case for an increase in U.S. borrowing costs.
“There is some optimism that the July hike is off the table,” Brendan Ahern, chief investment officer at KraneShares, which oversees four China-focused ETFs, said by phone on Monday. “The recent dovish comments from the Federal Reserve are sending a positive signal for emerging-market investors in general and those focused on China in particular.”
Traders also are putting money back into China as MSCI may include some mainland-listed equities in its benchmark indexes. The company’s gauges are tracked by investors with more than $10 trillion worldwide, and inclusion would give Chinese shares a bigger role in everything from global ETFs to pension funds and university endowments.
MSCI will announce its decision on Tuesday in New York. The index provider has been considering whether to include mainland-traded Chinese stocks since 2013. It has previously put off approval, citing concerns about market accessibility among the reasons.
The MSCI decision “will be a useful yardstick of how far market liberalization has come and the hurdles that remain,” HSBC Plc analysts including Paul Mackel, who expect some mainland-traded stocks will be included in the global indexes, said in a report. “That will also serve as useful guidance for China’s future market reform and the next steps needed for China A-Shares to be fully incorporated into the MSCI EM index.”