Investors Return to China ETFs Despite Coronavirus Fears

Holly Black: Welcome to the Morningstar series "Ask the Expert." I'm Holly Black. With me is Jackie Choy. He is Director of ETF Research at Morningstar in Asia. Hello.

Jackie Choy: Hi, Holly.

Black: So, plenty to keep you busy over the past few weeks. What have you been seeing in terms of where investors are putting their money or taking their money from in the ETF space in Asia?

Choy: Yeah, I think the big topic we're talking about here is the coronavirus. And interesting flows, sort of, direction when it comes to the ETF market investing into the China equity market. Because what we saw was that right at the beginning of outbreak, we saw quite some outflows from the onshore equity market or offshore equity Chinese equity market from all over the world basically, Hong Kong domiciled ETFs or US domiciled ETFs, or European domiciled ETFs. But after a month, into February we saw a change in direction where we saw offshore Chinese equity started seeing some inflows back into these ETFs, but for the onshore Chinese equity ETFs, we still see quite a bit of outflows.

Black: Okay. So, that was like – the initial reaction to the first announcement and the panic and then people realised that maybe shares start to look cheaper and then they buy back in. So, these flows are quite an interesting way to monitor how investors are feeling.

Choy: Yeah, I think this is kind of like what we are seeing from the retail market as well. People are panicking at the start and then like be more calm afterwards.

Black: Okay. And I think what's interesting as well is, people haven't been selling across the board. Some areas of Chinese ETFs have been seeing inflows and some outflows. Are there particular areas?

Choy: Well, as I mentioned, the offshore Chinese equities are kind of having the outflows sort of on a front loaded basis and started seeing inflows in February. But for the offshore equity market, we're seeing, kind of, outflows since the outbreak and towards February as well.

Black: Why do you think that might be?

Choy: Well, I think there are two aspects. Number one, for the offshore equity market, it's more the international players that are investing into these products. So, we're seeing people on top of the news and looking into the markets and reacting faster. When it comes to the onshore Chinese equity market, one aspect is, we haven't seen the market reacting as quickly as the overall market. Because if you look back at the equity market itself, we saw – because of the onshore Chinese equity market was closed having an extended Chinese New Year holiday until the 3rd of February. So, a lot of the reaction was kind of delayed as compared to the outside world. So, there are quite a bit different in terms of people's willingness in buying into the offshore versus onshore equities.

Black: With the onshore as well could there be a slight change because the government is more likely to intervene there and there are the limits on how much shares can fall in a single day.

Choy: Well, I think when we are looking at the market after the onshore equity market resumed, the floor wasn't big enough to hit the limit anyway, and very quickly, the market came back up. So, it wasn't quite because of the limits, but there's more of like the equities going back into the onshore market, so to supporting the market.

Black: Okay. So, after the initial panic, the Chinese stock market has actually recovered all of its losses already. What are you expecting to see over the next few months as this plays out?

Choy: Well, it's pretty hard to predict the actual market. I think what we should be focusing on is the development on a global basis because this is not just about China now. It's about the how the global equity markets reacting to what's happening with the virus situation going forward.

Black: Okay. Well, thank you so much for your time.

Choy: You're welcome, Holly.

Black: And thanks for joining us.