Ignoring China’s crackdown on stocks — and the looming risk many might get delisted from U.S. markets — is getting expensive. It’s starting to cost ETF investors real money on Chinese stocks.
More than $750 billion in market value has vanished from U.S.-listed Chinese stocks since February, based on an Investor’s Business Daily analysis of the roughly 100 holdings in the Invesco Golden Dragon China ETF (PGJ). The ETF only owns U.S.-listed Chinese stocks, which are presumably most at risk.
Investors are exiting already. Shares of Invesco Golden Dragon China dropped more than 40% since Feb. 1. That’s when the Chinese government started tightening rules on many of its publicly traded companies. Meanwhile, the risk U.S. exchanges might delist Chinese stocks makes losses all the more real.
“Investing in China or broader emerging markets using ETFs has long involved risk taking as China still remains a developing market,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. The Economist magazine took it a bit further, “The smart move, then, is to not be caught holding these shares when delisting draws near.”
But here’s the problem. If you hold on your China or emerging markets ETFs, will you end up holding the bag?
ETFs’ Unique Risk With Chinese Stocks
U.S. regulators pushed Chinese stocks for years to meet the same financial reporting standards as U.S. firms. The rules might be incoming.
Much hand-wringing kicked off following the April 2020 revelation China’s Luckin Coffee inflated revenue by more than $300 million. The Nasdaq delisted the stock in June 2020 and the company filed for bankruptcy protection in early 2021.
The danger some Chinese stocks get delisted presents investors with a dilemma. Holders in individual stocks can sell now. And many already are. The average stock in the Invesco Golden Dragon China ETF is down nearly 30% since February.
But with ETFs, which automatically hold Chinese stocks in indexes, selling stocks inside the portfolio is not an option. And it’s not just an issue with ETFs focused on Chinese stocks. Many popular emerging markets ETFs hold big positions in Chinese stocks. The massive $78.5 billion-in-assets iShares Core MSCI Emerging Markets ETF (IEMG) cut exposure to China, but it’s still “a hefty 30%,” Rosenbluth says.
ETFs Must Move Fast
Many ETFs providers will take smart steps to make sure this “isn’t a lose-your-shirt” situation, says Lara Crigger, managing editor of ETFTrends.com. She points out Chinese stocks wouldn’t get delisted overnight. Traders and ETFs would have time to adjust. Additionally, many Chinese stocks will be tradable in less regulated marketplaces, like the Pink Sheets.
Additionally, many larger Chinese stocks will likely shift to Hong Kong listings. That’s already happening. Of the 236 Chinese stocks listed on the NYSE, 16 are also listed in Hong Kong, says The Economist. “If your ETF owns shares of, say, Alibaba (BABA), and Alibaba delists, then the ETF could simply shift into or be given rights to the Hong Kong listing,” Crigger said.
Big ETFs providers say they’re ready. “Vanguard continues to monitor the evolving situation to limit the impact of delisting or other investment restrictions on investors in our funds,” said Michael Nolan, a spokesperson with Vanguard. “With respect to any policy actions to limit U.S. investors’ access to certain Chinese securities, we stand ready to reposition our funds as needed to safeguard the best interests of investors.”
Vanguard has trading operations in five regions around the world. And the firm trades on 47 world exchanges. The firm is equipped to use “whichever trading venue is best aligned with the interests of our investors,” Nolan said.
Making Adjustments To Chinese Stocks
Additionally, China is making policy adjustments to curb many of its fast-growing companies. New rules seek to hold back some e-commerce companies’ freedom. That’s prompting some large investors to sit out of Chinese stocks. Cathie Wood’s Ark Invest recently unloaded most Chinese stocks from its ETFs.
“Investors need to determine if they have a long term horizon or can stomach the volatility,” Rosenbluth said. “We prefer getting China exposure in a more diversified portfolio.”
Chinese Stock ETFs Suffer
Most of the largest fall from February 1 as regulatory risk heats up
|ETF||Symbol||Assets ($ billions)||Price % ch. from Feb.|
|iShares MSCI China||(MCHI)||$6.3||-24.2%|
|Xtrackers Harvest CSI 300 China A-Shares||(ASHR)||2.4||-9.8|
|SPDR S&P China||(GXC)||1.8||-22.6|
|WisdomTree China ex-State-Owned Enterprises Fund||(CXSE)||1||-26.0|
|KraneShares Bosera MSCI China A Share||(KBA)||0.8||-6.6|
|iShares MSCI China A||(CNYA)||0.6||-6.2|
|Invesco Golden Dragon China||(PGJ)||0.2||-40.9|
|KraneShares MSCI China Clean Technology Index||(KGRN)||0.2||-8.2|
|KraneShares SSE STAR Market 50 Index||(KSTR)||0.1||5.7|
|Franklin FTSE China||(FLCH)||0.1||-23.6|
Sources: ETF.com, IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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