U.S.-based exchange-traded funds (ETFs) focused on Chinese markets experienced a massive inflow of $5.2 billion in new assets during the past week. This sudden flood of investments occurred while China’s financial markets were closed for a week-long national holiday, leaving financial experts speculating whether this optimism will be long-lasting.
The fresh inflows followed Beijing’s rollout of a set of initial stimulus measures in late September, including interest rate cuts and adjustments to liquidity requirements for banks. This policy shift led to the largest single-day rally in Chinese stocks since the 2008 financial crisis on September 30, raising hopes that Beijing’s intervention could signal the start of a broader economic revival.
As Chinese markets resumed trading after the holidays on Tuesday, attention turned to upcoming announcements from senior officials at China’s top economic planning agency. Many investors are eager to hear details on how the government plans to implement its policies to boost economic growth, and whether the rally in Chinese stocks will gain further traction.
The timing of the $5.2 billion ETF inflow is significant, reflecting a sharp turnaround in market sentiment. To put this figure in perspective, the week ending October 4 saw a stark contrast with the average weekly outflow of $83 million for China-focused ETFs in 2024. Compared to the average outflow of $27 million in 2023, the recent surge is even more striking, according to Morningstar data.
“The market has been waiting for a credible commitment from China to get its economy going again,” noted Michael Reynolds, Vice President of Investment Strategy at Glenmede Trust, a New York-based boutique wealth management firm. “Now we need to see follow-through.” Reynolds’ sentiment captures the cautious optimism many investors are feeling. While the initial stimulus measures have been well-received, further clarity on long-term policies will be critical to sustaining this market enthusiasm.
The September stimulus package included key steps such as interest rate reductions and changes to bank liquidity requirements. These measures culminated in a September 30 rally, where Chinese equities posted their best one-day performance in over a decade. The CSI 300 Index, which tracks the largest mainland-listed firms, surged, triggering a wave of optimism that China may finally be moving to tackle the economic challenges that have long plagued its recovery efforts.
With the surge in Chinese stocks, U.S.-based ETFs targeting the Chinese market reaped the rewards. Among the beneficiaries was KraneShares CSI China Internet ETF, which pulled in $1.39 billion in new assets last week. The influx of funds has brought KraneShares’ year-to-date inflows back into positive territory after a turbulent year, according to Morningstar.
“The China markets have been so oversold,” commented Jonathan Krane, founder and CEO of KraneShares. His firm’s flagship ETF, now valued at $8.3 billion, was just one of more than 20 China-focused funds that enjoyed double-digit returns over the past week. Many of these funds gained between 10% and 28%, far outperforming the rest of the U.S. ETF market, according to data from Paris-based analytics firm TrackInsight.
Krane expressed confidence that this is just the beginning of a more significant shift, as many investors remain underexposed to Chinese equities. “This is just a very small percentage of the world getting back in or saying, ‘I need to rethink China,'” he said. “This was just the early money.”
Krane’s observation highlights a crucial factor: following China’s economic struggles earlier this year—marked by a sharp February selloff in the CSI 300 Index due to concerns about real estate, economic data, deflation, and geopolitical tensions—investors remain cautious. The recent inflows suggest that sentiment is beginning to shift, but the road to full recovery may still be long.
A significant portion of the new capital has flowed into large-cap ETFs offering broad exposure to Chinese stocks. BlackRock’s iShares China Large-Cap ETF, for example, saw inflows of $2.7 billion last week, according to Morningstar data. This ETF, valued at $7.99 billion, provides investors with access to some of China’s most prominent companies and has been a popular vehicle for those looking to capitalize on the country’s recent market rebound.
“When you see moves that are so vast and violent, you see money flow into these index-linked products first,” said Michael Barrer, head of ETF capital markets at Matthews Asia, an asset management firm specializing in Asian markets. Matthews Asia’s China Active ETF, which offers more tailored exposure to specific opportunities within China, saw net inflows of $11.7 million last week, boosting its total assets to $44.8 million.
This surge into broad-based ETFs suggests that investors are still hedging their bets, favoring well-diversified funds over more targeted strategies as they seek to ride the wave of recovery while mitigating risk.
Despite the surge in investment, many analysts believe that sustaining these inflows will require more than just short-term stimulus measures. Jason Hsu, founder and CEO of Rayliant Global Advisors, an asset management firm with a focus on China, emphasized the need for more substantial reforms. “The next bazooka that Beijing fires has to come in the shape of formalizing new stimulus proposals and adding a timeline,” Hsu said.
Investors are looking for clarity on several fronts: how China will address its ongoing real estate crisis, measures to stabilize its labor market, and efforts to reignite consumer spending, which has stagnated in recent months. A more comprehensive package of reforms—potentially including additional tax cuts, fiscal spending, or deregulation—could be necessary to sustain the rally in Chinese stocks.
Authorities in China appear to recognize this need, with the Securities Regulatory Commission announcing plans in late September to accelerate the approval of new ETFs focused on the “Star Market,” a technology-oriented segment of the Shanghai Stock Exchange. By directing more capital into domestic ETFs, China is signaling its intention to foster a more dynamic and innovative stock market, potentially laying the groundwork for future growth.
While large-cap ETFs have attracted the bulk of the new money, niche ETFs are also seeing increased interest as investors look for more specialized exposure to China’s growth sectors. Roundhill Investments, for example, launched its China Dragons ETF last week, focusing on nine of what it deems the largest and most innovative Chinese technology firms. Within just two trading days, the ETF attracted net inflows of $35 million, signaling strong investor appetite for more targeted plays on China’s tech sector.
“We figured that at some point soon, the tide would turn and China once again would be investable,” said Roundhill CEO Dave Mazza. His comment reflects growing confidence that China’s economic challenges may have bottomed out, paving the way for future gains—especially in sectors like technology, where the government has shown a clear commitment to fostering growth.
Despite the optimism, significant risks loom on the horizon. China’s economy faces structural challenges, including an ongoing property crisis, weak domestic demand, and the potential for further geopolitical tensions, particularly with the United States. These factors could limit the effectiveness of Beijing’s stimulus measures and lead to more volatility in Chinese markets.
Moreover, the global investment landscape remains uncertain, with rising interest rates in the U.S. and Europe, inflationary pressures, and potential recessions that could impact global risk appetite. Should these headwinds persist, they could temper investor enthusiasm for Chinese markets, especially if Beijing fails to deliver a clear roadmap for sustained economic growth.
The dramatic inflow of $5.2 billion into China-focused ETFs marks a significant turning point in investor sentiment, reflecting optimism that Beijing’s stimulus measures could signal the start of a broader recovery. However, sustaining these gains will require more than short-term fixes. Investors will be closely watching for further reforms, clear timelines, and concrete steps to address the underlying challenges facing China’s economy.
U.S.-based ETFs like KraneShares, iShares, and others are reaping the benefits of this newfound optimism, as investors hedge their bets on a sustained recovery in the world’s second-largest economy. But with risks still looming, the coming weeks will be crucial in determining whether this rally has legs—or whether it will prove to be another false dawn in China’s economic. As Beijing gears up for the next phase of its economic strategy, the global investment community remains on edge, waiting to see if this is the beginning of a new chapter of growth—or merely a temporary reprieve.
