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Morningstar data reveals that the iShares MSCI Emerging Markets exchange traded fund, valued at $21.6 billion, had an outflow of $1.9 billion. This was followed by a withdrawal of $89 million from the $7.6 billion iShares MSCI China ETF. Additionally, the $290 million iShares MSCI China A ETF saw outflows of $14 million, and the $17 million BlackRock China A Opportunities Fund experienced a net cash exit of $2 million.
The three funds—iShares MSCI China ETF, iShares MSCI China A ETF, and BlackRock China A Opportunities Fund—registered losses of 4.27%, 7.97%, and 5.4%, respectively, over the year to August 30.
These funds have investments in 20 Chinese companies identified by the committee as potential national security risks and acting against US interests. In response to these concerns, US lawmakers sent letters to BlackRock in early August seeking explanations about their holdings in these blacklisted Chinese firms.
However, experts like Jeff Tjornehoj, Broadridge’s US-based senior director of fund insights, suggested that political concerns may not be the primary driver of these outflows. He noted that ETFs focusing on the China region have seen negative flows in four of the past five months due to poor performance in Chinese equities.
Bryan Armour, Morningstar’s director of passive strategies research for North America, argued that the weakening Chinese economy has been a larger catalyst for the outflows. He noted that investors’ interest in the China-reopening trade has waned as growth targets fell short and risks increased, especially as developed markets have outperformed emerging ones.
BlackRock recently closed a Luxembourg-domiciled China equities fund due to lack of new investor interest amid China’s economic recovery struggles and a continuing slowdown in mainland stocks. The ongoing market volatility and underperformance of equities funds have led to a significant decrease in investor risk appetite for China-focused stock strategies.
Mutual funds focused on China saw $647 million in outflows in the second quarter of this year, while emerging markets ex-China strategies saw net inflows of $1 billion. The 10 largest China-focused mutual funds have seen their assets shrink by 40% since 2021.
Despite these challenges, some managers remain optimistic about the China market, highlighting low valuations and long-term opportunities in the growing wealth of Chinese consumers. They believe that geopolitical issues have led to overselling in China funds and investments, rather than fundamental problems with the investments themselves.
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