Exchange-traded funds focused on China are posting the world’s biggest outflows amid concern economic growth is slowing.

Withdrawals from U.S.-based Chinese ETFs totaled $87.5 million March 10, the most among 46 nations, bringing this year’s redemption to $380.7 million, according to data compiled by Bloomberg. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 1.6 percent to $33.90. The Bloomberg China-US Equity Index of the most-traded stocks in the U.S. dropped 2 percent to 99.60, led by Vipshop Holdings Ltd. (VIPS)

Official data over the weekend showed the steepest slide in exports since 2009 and the slowest inflation in 13 months, highlighting the challenges for Premier Li Keqiang in achieving this year’s economic-growth target of 7.5 percent. China had its first onshore bond default after Shanghai Chaori Solar Energy Science & Technology Co., a solar-panel maker, said last week it would fail to pay interest on notes due March 2017.

“Investors are pulling out of financial markets where there’s an economic slowdown and a lot of uncertainties,” Dave Lutz, the head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said yesterday. “The outflow of capital from China will not end until investors stop seeing all the headlines about China indicating the country’s growth is faltering.”

David Fuller's view

This is certainly understandable because the world’s second biggest economy is obviously going through a difficult transformation stage.  Moreover, China looks like a conundrum to many observers because the timing of its next recovery or even the next policy decision of importance remains difficult to predict.  As China’s Shanghai A-Shares Index (weekly & daily) has sagged, no one really thinks the 7.5% GDP growth target is achievable. 

Against this background, are the ETF outflows from China’s stock market a smart move or a contrary indicator?

My guess is that most of those US-based Chinese ETFs track the Hong Kong Hang Seng Index (weekly & daily) more closely than the Shanghai A-Shares shown above.  Nevertheless, this selling of Chinese ETFs looks like a capitulation move, due to serial underperformance relative to Wall Street over the last five years.  As such, even if it is right in the short term, and that is no certainty given the US stock market’s somewhat overextended and overvalued condition relative to most other countries’ share markets, a consensus move of this nature looks like a contrary indicator over the lengthy medium term. 

Meanwhile, the Hong Kong Hang Seng Index shown above has a trailing p/e of 10.37 and yields 3.5%, according to Bloomberg.  In contrast, the S&P 500 has a p/e of 17.21 and yields 1.94%.  Yes, the USA has big advantages, led by technology and competitive energy costs, as I have said repeatedly over several years, but it is also overdue for a correction of at least 10%.

(See also Eoin’s comments on S&P shares below.)