Correction Seems Over: Time For China ETFs?

Concerns over the Chinese economy had reached a delirious pitch in August. Issues like credit crunch, shadow banking activities, faltering manufacturing activity and a weak domestic market had first surfaced in 2012 and led to a hard landing for the economy.

These concerns kept bothering the economy at regular intervals during the last three years. But recently these swelled up to take a gargantuan shape and tormented business globally. The economy’s GDP growth rate skidded to 24-year low in 2014. With no let-up in the downbeat data flows from the Chinese economy, investors have now started to doubt its ability to deliver the growth target for this year.

Still the Chinese stocks performed phenomenally in the first half of 2015 with some of the ETFs having almost doubled. A series of rate cuts and easy policy measures made this possible. But this astounding run had to have a finishing line somewhere and thanks to this logic, the Chinese equities fell in the trap of a steep correction from June.

A host of factors prompted this correction. Among these, overvaluation concerns after a steep ascent for about one year, small doses of economic stimulus failing to boost the struggling economy and the Chinese securities’ regulator’s repeated warnings about riskier trading as well as tightened rules for margin lending triggered the sell-off.

Apart from this, to arrest the market crash, the Chinese government stopped new companies from selling shares to the public, introduced a fund to be used for purchasing shares earlier this month and banned investors with an over 5% stake from abandoning their shares for six months.

In fact, the Chinese stock market underwent heavy panic-induced sell-offs several times in the last three months – August being the cruelest – mercilessly lashing the global markets. Behind the recent bloodbath was the Chinese policy makers’ devaluation of the country’s currency yuan by 2% in mid August, apparently to shore up export competitiveness. This along with a six-and-a-half-year low Chinese manufacturing data for August went against the risk-on sentiment among investors.

The Shanghai Composite Index has plunged about 39% since June 12 and Chinese stocks lost over $5 trillion in the recent rout. In the last one month (as of September 8, 2015), db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (ASHS – ETF report) lost over 33% while large-cap China ETF iShares China Large-Cap ETF (FXI) was off over 13%.
Almost all ETFs erased their gigantic gains earned in the beginning of 2015. ASHS is off over 5% while one of the top performing Chinese ETFs of the first half Market Vectors ChinaAMC SME-ChiNext ETF (CNXT) is now left with just 4% return.

Is the Correction Over?

After this high drama, there was only one question in every mind. When will the correction be over? And to soothe investors’ nerves, PBOC which is known for too much interference in the stock market commented that the China market crash is ‘almost over’ aided by government intervention. Yuan is also settling against the greenback after a topsy-turvy August.

To add to this, China announced that it would eliminate personal income tax on dividends for long-term shareholders holding stocks for over a year and halve the tax for those who hold between a month and a year, per Reuters. The move was steered to bolster long-term investments, ward off short-term turbulence from the market and bring in stability over there.