The biggest Chinese exchange-traded fund in the United States is losing money faster than any other country-focused ETF, even as the lowest valuations since 2008 are convincing brokerage firms in the Asian nation that it is time to buy.
Investors pulled a net $961.2 million from the iShares FTSE China 25 Index Fund (FXI) this year, the most among 140 single-country ETFs that trade on U.S. markets, according to data compiled by research firm XTF Inc. The outflows coincided with a decline in the Shanghai Composite Index's price-earnings ratio, using estimates for the next year, to 11.6, a valuation last seen during the financial crisis in November 2008.
Valuations in the Shanghai Composite have slumped after the country's central bank raised lender reserve requirements for the 12th time since the start of last year and increased benchmark interest rates for the fourth time. The People's Bank of China is tightening monetary policy to curb inflation, which climbed in May to the highest level since July 2008.
“China's been too popular, and money's starting to flow out,” said Kenneth Fisher, who oversees $44 billion as chief executive of Fisher Investments Inc. “It's outside China where the interest has been focused — and primarily in America.”
LOW MULTIPLES
Brokers in China said that the lowest multiples since economic growth collapsed three years ago will lift equities. Citic Securities Co., the nation's largest brokerage firm, and China International Capital Corp. both predict that the Shanghai Composite will rally in the second half as the government eases monetary policy to sustain growth.
U.S. investors aren't convinced.
FXI, which trades on the New York Stock Exchange's Arca platform, has climbed about 0.5% this year amid concern that China will struggle to control inflation, as well as increased regulatory scrutiny following accounting problems of Chinese companies listed in North America. The China-linked security tracks the 25 largest Chinese stocks on the Hong Kong exchange.
Money managers in the United States now are favoring the world's second-biggest emerging market, pouring money into the largest Brazil ETF. About $1.43 billion has gone into the iShares MSCI Brazil Index Fund this year.
The Shanghai Composite Index has dropped about 1.7% this year, compared with the 8.5% slump by Brazil's Bovespa Index.
“It's certainly counterintuitive, because you're used to thinking that performance drives money flows in and out,” said Nicholas Colas, chief market strategist at BNY ConvergEx Group LLC. “China is raising interest rates, and that's caused money flows out of the country, while the underlying index has been generally fine.”
Although developed-market equities and other emerging-markets stocks have struggled this year, the ETFs that track some of these countries have managed to attract U.S. investors. The iShares Brazil ETF has had the sixth-biggest inflows this year, while falling about 4.2%.
The single-country ETF that has lured the biggest investment this year is the iShares MSCI Japan Index Fund, which has drawn $2.63 billion in assets even while declining about 3.6%. FXI has lost about $564.5 million in the past three months, XTF data show.
“We've seen heavy selling the last few weeks,” said Eric Lichtenstein, the managing director of ETF trading at Knight Capital Group.
The China ETF's outflows may be due to the “overall negative view of equities,” he said.ECONOMIC CONCERNS
Concern about the Greek debt crisis and the end of the Federal Reserve's stimulus measures in the United States have spurred investors to sell equities globally.
The MSCI All-Country World Index of developed and emerging markets has erased about 3.4% since climbing to a high of 357.72 on May 2. The MSCI Emerging Markets Index has slumped about 2.4% over the same period.
The market capitalization of all 26 ETFs that track only China is $10.2 billion, according to XTF data. Investors have withdrawn $1.04 billion from the group this year.
The Guggenheim China Small Cap ETF (HAO) saw the second-biggest outflows among China-focused ETFs, losing $122 million. Economists predict that China's expansion, which has averaged more than 10% over the past decade, may slow to 9.5% this year, according to the median estimate in a survey by Bloomberg.
Mr. Fisher said that money managers may be wary of China's economy, given that economists and investors have warned of a property bubble in the region. Standard & Poor's on June 15 cut its outlook on Chinese developers, echoing concerns by bears such as hedge fund manager Jim Chanos.
New home prices rose in 67 of 70 surveyed Chinese cities in May.
U.S. investors may be exiting Chinese equity funds after reports that companies from Longtop Financial Technologies Ltd. to Sino-Forest Corp. were exaggerating operations, Mr. Colas said.
“The fundamental problems China has — controlling inflation, its monetary policy — are more important drivers, but it can't help,” he said.
Although investors have grown bearish on China, the outflows for FXI also may be driven by a decline in short interest in the country's equities, according to Mr. Colas and Mr. Lichtenstein. The short-interest ratio for FXI sank to 1.42 on June 15, the lowest level in more than a year.
