Chinese fervour for overseas stocks is breaking ETF trading

Chinese investors are shifting away from onshore equities as they lose patience with the market’s underwhelming performance

Chinese traders are willing to pay as much as 40 per cent more than the value of the underlying assets in some ETFs to obtain exposure to foreign stocks

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China-listed ETFs with foreign exposure excluding Taiwan and Hong Kong have garnered US$1.3 billion of net inflows this year. Photo: Shutterstock

Published: 2:00pm, 30 Jan 2024

Burned by years of underperformance in Chinese domestic stocks, local investor appetite for overseas equities is running so high that it’s fuelling huge price distortions in funds tracking these assets.

Chinese traders are willing to pay as much as 40 per cent more than the value of the underlying assets in some exchange-traded funds to obtain exposure to foreign stocks. That is triggering trading halts in a number of ETFs as well as purchase limits.

With the S&P 500 Index hitting a record high and gauges in Japan reaching levels last seen decades ago, it’s not hard to see why Chinese investors are changing tack. But the whopping premium in ETFs tracking overseas equities may evaporate, raising the risk that investors will be saddled with the same losses that they have tried to escape from at home.

“Capital hunts profits, and with mainland shares so weak, it’s natural for investors to look for” exposure to other markets, said Li Minghong, portfolio manager at Beijing Yikun Asset Management, which manages a fund of funds. “It’s not all retail money, and there are institutional investors in these ETFs as well.”

China’s retail equity investors have coined a slogan: ‘put your trust in the fate of the nation, but put your money in the Nasdaq.’ Photo: NurPhoto via Getty Images

The premium on the E Fund MSCI USA 50 ETF QDII soared to an all-time high of more than 40 per cent last week as traders piled in, while that on a similar product tracking Nikkei 225 surged to more than 20 per cent.

Because of capital controls, onshore individual investors seeking to buy overseas equities have few avenues. ETFs on the Qualified Domestic Institutional Investor programme and their feeder mutual funds are among the most popular channels for retail traders. The QDII programme allows an institutional investor who has met certain conditions to invest in foreign securities with a prescribed quota.