China-Focused ETFs Have Become 'Political Footballs' In US As Investor Apprehension Leads To Large Scale Shutdown

The year 2024 has reportedly seen a record number of U.S.-listed China-focused exchange-traded funds (ETFs) closing down, marking an all-time high since the inception of these funds. This trend reflects growing investor concerns about the world’s second-largest economy.

What Happened: According to data from Morningstar Direct, 13 U.S.-listed China ETFs have ceased operations in the first quarter of 2024 alone, the Financial Times reported on Monday.

This surge in closures significantly surpasses the previous annual record of five closures in 2020 and 2023. Despite the global popularity of ETFs, which have seen 58 consecutive months of net inflows, leading to a record $12.7 trillion in assets by the end of March, ETFs focused on environmental, social and governance (ESG) factors are also witnessing record closures in the U.S. and globally.

Bryan Armour, director of passive strategies research, North America at Morningstar, links these closures to political pressures, stating that both China-focused and ESG ETFs have become “political footballs.”

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Furthermore, the rate of new ETF launches has significantly dropped. Only 33 China ETFs were introduced in the first quarter of 2024, a drastic decline compared to the 160 launched during 2023 and a record 291 during the peak in 2021. Similarly, the 18 ESG launches in the first quarter are a sharp slowdown from last year's 151 and 2021's peak of 313, as per Morningstar data.

Despite these closures, global ETF assets have increased. ESG ETFs worldwide now hold a record $542 billion of assets, driven by rising demand in Europe. Similarly, China-focused ETFs now hold $364 billion, up from $320 billion at the start of the year.

Why It Matters: Earlier this year, Chinese stocks saw a significant rally, with the SSE Composite Index reaching its highest level since September, indicating a potential economic turnaround. This was largely due to the country’s economic recovery following the bursting of a real estate bubble.

Moreover, key ETFs such as KraneShares CSI China Internet ETF KWEB, KraneShares Bosera MSCI China A 50 Connect Index ETF KBA, iShares MSCI China ETF MCHI, and iShares China Large-Cap ETF FXI outperformed major U.S.-equity ETFs, signaling a potential shift in the market landscape.

Despite the closures, the potential for growth in China’s internet and technology industries remains promising, as stated by Henry Greene, Investment Strategist at KraneShares, in an exclusive interview with Benzinga. This indicates the complex dynamics at play in the Chinese market.

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