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Three takeaways:

  • China’s economy is showing signs of a rebound, sparking a stock rally that’s made domestic Chinese equities among the best-performing markets in 2020
  • Inflows into China-focused U.S. listed mutual funds and ETFs turned positive this month following 11 weeks of outflows1
  • Structural changes now underway, including technological innovation and a large, growing middle class, underscore the long-term potential for Chinese equities

The Chinese stock market kicked off the summer with a wild rally. The MSCI China A index, which holds Shanghai and Shenzhen listed stocks, surged 10% in the month of June.2 And China, the world’s second-largest equity market by value, remains the top country performer with an impressive 16.7% return year to date.3

Figure 1: Regional performance YTD

Chart: Regional stock market performance YTD

Source: Thomson Reuters, as of July 17, 2020. Bar graph showing total returns of MSCI country indexes YTD, in dollar terms. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Optimism is building that China’s industrial output is rebounding, helping confirm the idea that the country first impacted by the coronavirus may be among the earliest to recover. The most recent reading of the Caixin China General Manufacturing PMI, a survey of factory activity, surpassed expectations. And China's Gross Domestic Product (GDP) returned to growth during the second quarter. Growth in total social financing, a broad measure of credit and liquidity in the economy, continues to accelerate, up 12.8% in June from a year earlier and is a potentially leading indicator economic growth is finding support.4 Taken together, the readings suggest that demand appears to be recovering, an important sign for further recovery in the second half of 2020.5

U.S.-listed Chinese fund flows turn positive

Fund investors soured on China and other emerging markets earlier in 2020 as investors weighed the impact of the coronavirus and rising U.S.-China tensions, However, the trend reversed in July and new investment began to move back into U.S.-listed China ETFs earlier this month.6

Figure 2: U.S. listed ETF flows into major EM markets

Chart: U.S. listed ETF flows into major EM markets

Source: Markit, BlackRock, as of July 20, 2020. Flows are subject to change.

Does the China bull market have legs?

Local investor sentiment has turned more bullish in the recent months, an important fact given that China’s equity market has traditionally been dominated by domestic retail investors. New retail investor account openings surged 30% in June from a month prior at some brokerage firms in China recently, which could potentially lead to more retail buying in the next few months.7

To be sure, there are reasons to be cautious. Uncertainties about future outbreaks of COVID-19, renewed U.S.-China tensions and the potential for future investment restrictions by both the U.S. and China remain.

Even so, the long-term case for Chinese equities remains intact. BlackRock believes that structural trends such as a robust middle class, technology innovation, and financial market reforms should help support Chinese equities in the years to come.

As the world’s second largest economy, China is a leading force in the megatrend of emerging global wealth as the country’s base of urban middle class continues to expand. These affluent consumers, along with the increased numbers of skilled workers and enormous growth in urban infrastructure, could offer a large range of market opportunities not only for business, but also for equity investors in the next decade.

Government support for research and a low-cost, high-skill workforce will help solidify China’s competitive advantage in technology. Meanwhile, the gradual opening-up of China’s domestic market, such as the inclusion of domestic stocks into global indexes, provides foreign investors additional access to growth opportunities in China.

Unlocking China with ETFs

For U.S. investors, exchange traded funds (ETFs) can offer efficient and cost-effective access to China’s stock market in different iterations.

ETFs can help unlock access to both China’s A-share marketplace, which includes domestic shares listed onshore. ETFs can also help provide access to China H-share marketplace for Chinese companies listed on Hong Kong’s stock exchange.