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Market Extra: China-focused ETFs fall after country’s growth disappoints, deepening 2023 losses

Exchange-traded funds that target Chinese stocks were falling Monday, after China reported disappointing growth for the second quarter, bringing the ETFs deeper into the red so far this year.

Shares of the iShares MSCI China ETF

were down 0.8% Monday afternoon, while the KraneShares CSI China Internet ETF

fell 0.6% and the Xtrackers Harvest CSI 300 China A-Shares ETF

shed 0.6%, according to FactSet data, at last check.

China reported that its economy grew 6.3% in the second quarter on a year-over-year basis, falling short of expectations. At the start of 2023, some investors were optimistic that the reopening of China, the world’s second largest economy, from stringent COVID-19-related restrictions would provide a boost to its growth

“With yet more disappointing news about China’s economic rebound, it is worth taking stock of the headwinds facing the country’s equity market,” said Jonas Goltermann, deputy chief markets economist at Capital Economics, in a note Monday.  

“Fears around US-China tensions, concerns around China’s struggling property market (a key part of the country’s growth model), and the regulatory uncertainty around the ‘common prosperity’ agenda are all, in our view, reasons to worry about of the prospects of Chinese equities – even if, at this point, those fears are appear largely priced in,” Goltermann wrote.

Read: Investors start to fret that China and Europe may drag U.S. economy down with them

The fresh data on China’s second-quarter growth arguably represent more of a confirmation of market fears over “longstanding headwinds” as well as other signs of its “post-lockdown rebound faltering,” rather than “a major surprise,” according to his note. 

So far this year, shares of the iShares MSCI China ETF are down 2.6%, while the KraneShares CSI China Internet ETF has slid 3.7% and the Xtrackers Harvest CSI 300 China A-Shares ETF has fallen 2.4%, according to FactSet data, based on Monday afternoon trading. 

“A key driver of the poor performance of China’s equity market and, arguably, an underlying explanation of its low valuation, is that earnings per share have trended down over the past decade,” Goltermann said. 

“MSCI’s China Index has dropped by more than 15% since its peak in late January, even as stock markets elsewhere have continued to power ahead,” he said. “The gap between the China Index and the global All-Country World Index is now wider than it was last autumn, before the authorities abandoned the ‘zero-COVID’ approach.”

which invests globally in stocks in developed and emerging markets, has surged more than 15% so far this year, FactSet data show, at last check.

The China damped global market sentiment, but U.S. stocks appeared to shake off early weakness, with the Dow Jones Industrial Average

up around 85 points, or 0.2%, while the S&P 500

rose 0.3%.

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