Chinese Stock ETFs Struggle Amid Stimulus Doubts

Yardeni Research remains unconvinced that recent stimulus measures will make China a more attractive investment than the U.S. or India, stating that “it would take much more than interest-rate cuts, easier financing, and fiscal stimulus.”

Chinese stocks have been under pressure, with recent declines wiping out gains from the September rally driven by China’s stimulus announcement. “Investors appear to have lost faith that government intervention will resolve the deeper issues in China’s economy,” Yardeni Research commented in a recent briefing.

“The quick rally in Chinese equities now looks short-lived.”

Exchange-traded funds (ETFs) investing in Chinese stocks have struggled. The iShares MSCI China ETF (MCHI) is on track for a 5.6% drop this week, despite a sharp increase on Wednesday, following a 7.7% loss last week. Other China-focused ETFs have fared even worse, extending their October losses.

For example, the Invesco China Technology ETF (CQQQ) and KraneShares CSI China Internet ETF (KWEB) both saw weekly losses of around 7.5%, while the Invesco Golden Dragon China ETF (PGJ) dropped 7%, according to FactSet data. So far this month, these ETFs have continued their downward trend, with KWEB down nearly 5%, and MCHI retreating over 2%.

“Aside from the risks of investing in China, corporate earnings have been stagnant for the past 15 years and have consistently disappointed since 2022,” Yardeni noted. “It’s easier to manipulate national growth numbers with government projects, but corporate earnings tell a more truthful story.”

China faces nearly $36 trillion in outstanding bank loans, which is three times the U.S. figure. Yardeni Research likened China’s current challenges to those the U.S. faced after the global financial crisis, suggesting that without a large-scale fiscal stimulus, similar to the U.S. response during the pandemic, China may struggle to reignite growth and inflation.

Consumer confidence in China has collapsed, and Yardeni pointed out that higher stock prices alone won’t be enough to boost spending. With China’s housing minister set to announce more measures to support the property sector, Yardeni remains skeptical.

“Trying to stimulate an over-leveraged economy with easier financing may not be the solution. It will take time for consumers and businesses to rebuild their balance sheets after a period of excessive debt,” the firm concluded.