China ETFs draw heavy state-backed inflows as Beijing supports tech stocks

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China state-backed tech ETF inflows

Highlights

Net inflows into nine state-supported China ETFs reach $11.5bn on Tuesday, with heavy allocations to Star 50 and ChiNext tech indices.
Shanghai's Star 50 jumps 9.9% and Shenzhen's ChiNext rises 6.4% on Wednesday, while the broader CSI 300 gains 2.3%.
Despite state support, CSI 300 is down over 11% year-to-date and margin financing loans drop to Rmb2.3tn from over Rmb3tn since June, indicating fragile confidence.

State buying shifts toward technology benchmarks

As reported by Financial Times, citing Bloomberg, net inflows into nine exchange traded funds commonly used by Beijing to support the market reach $11.5bn on Tuesday, the second-highest daily total on record. A large share of that buying goes into ETFs tracking China’s two main technology indices, Shanghai’s Star 50 and Shenzhen’s ChiNext.

The two indices jump 9.9 per cent and 6.4 per cent respectively on Wednesday, while the broader CSI 300 gains 2.3 per cent. On Tuesday, inflows into ChinaAMC’s Star 50 ETF hit $1.7bn, the second-highest amount on record after July’s support measures, while EFund’s ChiNext ETF draws $1.4bn, its third-largest inflow on record.

Song Zhe, senior investment specialist at BNP Paribas Asset Management, says the pattern marks a shift from earlier state-backed ETF buying. He says most previous inflows were concentrated in the CSI 300, whereas the latest intervention shows stronger emphasis on technology-related indices.

Investor confidence remains fragile

China’s stock market, especially its technology-linked sub-indices, has faced heavy selling pressure since July. The CSI 300 is down more than 11 per cent this year, and the Star 50, which was up more than 60 per cent at its peak for the year, is also in negative territory, even as the U.S. S&P 500 and Nasdaq 100 both rise by double digits.

In July, the so-called national team channels close to $9bn into the Star 50 index in an effort to improve sentiment ahead of CXMT’s Shanghai IPO, after a global rout in memory stocks spreads to China. Song says the national team sees ChiNext and the Star Board as crucial markets representing the future of China.

Some investors remain unconvinced by the intervention. Sam Konrad, investment manager in the Asian equity income team at Jupiter Asset Management, says the recent moves suggest the equity market is too reliant on government support, adding that while the measures may help in the short term, they do not alter the long-term outlook for Chinese equities.

Retail investors also appear cautious despite renewed support efforts. Outstanding margin financing loans in China, often used as a gauge of retail sentiment, fall to Rmb2.3tn from a peak of more than Rmb3tn at the end of June.

In our earlier article on China’s fresh policy support to lift growth, we discussed expectations for a modest third-quarter pickup that still leaves expansion near the low end of Beijing’s annual target range. We noted that policymakers were rolling out targeted rate cuts, mortgage support and additional debt quotas to ease strains, while weak domestic demand and property-sector stress continued to weigh on confidence despite resilient exports.

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