Source: China Fund Daily
Author: Wu Juanjuan

The reporter learned that on January 12, 2023, the US ETF supplier Jinrui Fund launched a new ETF for the Chinese market.$KRANESHARES CHINA INTERNET AND COVERED CALL STRATEGY ETF (KLIP.US)$. Following the establishment of long BABA's ETF by Granite Shares, an overseas alternative ETF supplier, on December 13, 2022$GRANITESHARES 1.75X LONG BABA DAILY ETF (BABX.US)$A month later, Jinrui Fund, an American ETF supplier, stepped in to launch ETF for the Chinese market.

At the same time, the scale of China's largest overseas ETF has reached a new high. This information shows that in addition to northward capital, overseas investors are also adding weight to China through other channels.

Let's take a look.

Chinese ETF with downlink protection

The fund information disclosure document from the Jinrui fund website shows that it is an actively managed ETF, that is, ETF is not just a simple tracking index. According to the fund information disclosure document, KLIP fund assets on the one hand are invested in another ETF that tracks China's Internet index, which is owned by Jinrui Fund.$KraneShares CSI China Internet ETF (KWEB.US)$Or other similar securities, on the other hand, through the use of derivatives to provide some downside protection.

To put it simply, KLIP sells KWEB call options to investors. When KWEB falls, the option fee earned by KLIP can cushion some of the loss. However, when KWEB net worth rises, KLIP loses some of the increase. In addition, KLIP is a revenue-providing ETF, which is listed on Nasdaq.

Jin Rui fund CIO Brendan Ahern told China Fund News that from historical data, the Chinese Internet is more volatile than American Internet, technology stocks or emerging market stocks as a whole. Therefore, the volatility of KWEB is larger, and generally speaking, the higher the volatility of the underlying option, the more expensive the option fee of the linked option. This means that KLIP is expected to offer higher returns than ETF, a similar strategy that covers other markets. According to the fund letter material, KLIP distributes income to investors each month based on the option fees it receives.

Asked about his attitude towards the current Chinese market, Brendan Ahern replied that he had a constructive attitude towards the Chinese stock market in 2023. At present, the three major issues that are crucial to China's economy and consumer sentiment have all shifted to the positive: Sino-US relations, epidemic prevention and control policies and real estate policies have all shifted. China's restart is good for economic growth, especially for domestic consumption and Internet companies. At present, central banks in Europe and the United States are still adopting tight monetary policies to control inflation, while China's monetary and fiscal policies are loose because inflation in China is very low. In addition, valuations of Chinese stocks are still reasonable.

Brendan Ahern believes that given the strength of U. S. stocks and the dollar over the past decade, investors around the world are now overweight U. S. stocks. For these reasons, valuations of Chinese and other non-US stocks are attractive. Investors will see this sooner or later. Some investors will find this earlier than others. Brendan Ahern believes that the shift from US stocks to non-US stock markets is a huge shift. For investors, on the one hand, it is difficult to make changes, but on the other hand, KWEB's capital flows have shown that some investors are ready for a rebound in the Chinese market.

He further pointed out that China's economic rebound will boost consumer sentiment. This will help Chinese stocks as a whole, but some sectors or sectors will benefit more. The huge amount of excess savings formed by Chinese residents in 2022 provides the potential for consumption. KWEB, which tracks the Internet index, will benefit from the recovery in Chinese consumption, while ETF, which tracks the leading consumer in China, will also benefit from the recovery in consumption.

Jinrui Fund focuses on China ETF, launched in overseas markets-KWEB, which later became an "Internet celebrity" ETF, and dozens of other Chinese-themed ETF. Among them, KWEB is one of the most popular overseas Chinese ETF. At one point it was worth more than $8.5 billion. The net worth fell in 2021 and 2022, and the size of KWEB shrank accordingly. After the recent market rebound, the size of KWEB rebounded again. The current size of KWEB is about $7.77 billion.

The ETF of the largest overseas Chinese stock hit a new high.

The influx of northbound capital is evident in the sentiment of overseas institutions to be bullish on China. On the other hand, the overseas-listed ETF confirms the "long China sentiment" opened by overseas markets from another perspective. For example, China's ETF, the largest overseas listing, is the ETF that tracks the MSCI China Index.$iShares MSCI China ETF (MCHI.US)$A few days ago, the scale reached a record high of US $9.09 billion, equivalent to about 61.581 billion yuan.

The MSCI China Index tracked by MCHI is a broad-based index, but based on the rules of index compilation, some industries account for a relatively high proportion in the index. For example, information from the ETF.com website shows that the technical services industry accounts for 20.02% of the index, while the financial sector accounts for 18.34%. The top ten heavy stocks in the index are$TENCENT (00700.HK)$、$Alibaba (BABA.US)$、$Meituan-W (03690.HK)$、$JD.com (JD.US)$、$CCB (00939.HK)$、$PING AN (02318.HK)$、$Pinduoduo (PDD.US)$、$BIDU-SW (09888.HK)$、$NetEase, Inc.-S (09999.HK)$、$WUXI BIO (02269.HK)$. The top ten heavy stocks accounted for 41.78%.

In addition to MCHI, the scale of Chinese ETF, which is larger overseas, has increased more or less recently. For example, there are 6 ETF (tracking MSCI China Index), KWEB (tracking China Internet Index), and 6 Chinese stocks listed on the US market with a size of more than US $1 billion.$iShares China Large-Cap ETF (FXI.US)$(FTSE China 50 Index),$Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR.US)$(tracking the CSI 300 Index),$Spdr Index Shares Funds Spdr S&P China Etf (GXC.US)$(tracking the S & P China Index),$Invesco China Technology ETF (CQQQ.US)$(track China Science and Technology Index). The sizes of the six ETF are US $9.09 billion, US $7.77 billion, US $6.17 billion, US $2.29 billion, US $1.34 billion and US $1.04 billion respectively.

At present, there are 60 Chinese ETF listed on the US market, covering asset classes including stocks, bonds, currencies and so on. The total size of these Chinese ETF under management is 32.54 billion US dollars, or 220.442 billion yuan.

Buy it and buy it!

According to the relevant regulations, when the proportion of shares held by foreign investors exceeds 28%, the HKEx will suspend the purchase of the corresponding Shanghai Stock Connect or Shenzhen Stock Connect shares, but can still accept selling orders (commonly known as "shares are sold out"). However, this does not mean that foreign investors can not buy it. Foreign investors can still buy shares through the qualified foreign investor (QFI) channel. When foreign investors own 30% of the stock, QFI can't buy it either.

According to information disclosure from the Shenzhen Stock Exchange, as of January 18, 2023, foreign ownership of six stocks exceeded 24%. Among them, three stocks are held by foreign investors with a proportion of more than 28%. What is particularly noteworthy is that$Beijing Oriental Yuhong Waterproof Technology (002271.SZ)$. The stock is 29.31% owned by foreign investors. This means that although the Shenzhen Stock Exchange is closed, foreign investors continue to buy through the QFI channel after foreign ownership reached 28%.

Dongfang Yuhong is not alone. Data from Wind show that northward capital has flowed 103.275 billion yuan in January 2023.

For the past month,$Ping An Insurance (601318.SH)$Attract a net inflow of northward capital of 9.374 billion yuan$Wuliangye Yibin (000858.SZ)$Attract a net inflow of northward capital of 8.239 billion yuan$Kweichow Moutai (600519.SH)$Attract a net inflow of northward capital of 8.239 billion yuan$Contemporary Amperex Technology (300750.SZ)$Attract a net inflow of northward capital of 5.637 billion yuan.

Jingshun Kristina Hooper: China's recovery may be at hand

Kristina Hooper, chief global market strategist at Jingshun, said in his weekly investment report on LinkedIn that China's stock market has performed well in 2023. Stocks have risen by double digits in the first two weeks of 2023. Investors are excited by China's resumption and optimization of epidemic policies. When Chinese stocks began to rebound last year, investors may still be wondering when we will see signs of a strong recovery in the Chinese economy.

Kristina Hooper thinks recovery may be just around the corner. On the one hand, despite the market's response to China's GDP growth in 2022, China's answer paper exceeded expectations. On the other hand, even though the optimization of epidemic prevention and control policies has dragged down economic activity, China's economic and living activities in December were exciting.

Kristina Hooper thinks she is now more optimistic about China's economic situation in the first quarter. Previously, she thought the first quarter might be complicated. Because of the Lunar New year, family reunion and so on stimulate consumption. But the "Spring Festival travel" will undoubtedly increase the number of COVID-19 infections. It could be a further drag on the economy. But judging from the economic activity in December, she now believes that the possible positive impact is major.

The worst-case scenario is weak economic activity in the first quarter, but even so, one can expect China's strong economic growth in the second quarter, driven by strong household consumption. All in all, Kristina Hooper expects China's GDP to grow by more than 5 per cent for the whole of 2023.

Edit / Somer