Inside The Crash Of China's ETFs

China was hot and soaring among all stock markets across the globe for the most of this year thanks to rounds of ultra-easing policies. In fact, China was leading the global markets, attaining the best performing country spot for the first half of the year. (read: 5 Top Performing Country ETFs of 1H).

But the incredible run was washed away over the past few weeks as concerns brew over the longevity of the stimulus-driven rally and the real health of the economy. Further, worries over lofty valuations raised a panic alarm among investors after a one-year stupendous rally.

What Let the Dragon Out

Several factors led to the recent stock crash in China. First, more than 40% of the mainland China companies halted trading locking up $2.6 trillion worth of shares. This is touted to be the largest wave of trading halts in the history of the Chinese equity market.

Additionally, the world’s second largest economy is faltering with slower growth in six years, a credit crunch, a property market slump, weak domestic demand, lower industrial production, and lower factory output. Corporate profits are also lower than a year ago. Additionally, a slew of recent measures including fresh interest-rate cuts, stock purchases by state-directed funds, looser margin-financing rules, central bank pledge of liquidity support, and suspension of new listings are not helping in any way to boost investors’ confidence.

Lastly, deepening Greece crisis and Grexit fears shook investors across the globe, a creating risk-off trading environment (read: ETFs to Gain & Lose as Greece Crisis Deepens).

The combination of factors led to a dragonish sell-off in the Chinese market. The Shanghai Composite Index plunged over 8% last week, extending its steepest three-week decline since 1992. With this, the index tumbled 32% since its peak in June 12 and wiped out more than $3.5 trillion in market capitalization. On the other hand, Hong Kong’s Hang Seng Index plunged as much as 8.6% on the day, making the biggest drop since November 2008.

ETF Impact

Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one month, putting an end to their winning streaks, and landing them in the bear territory (see: all the Emerging Asia Pacific ETFs here).

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