Chinese stocks are charging higher.
The Shanghai Composite index has climbed over 15% in the last two weeks to highs not seen since 2018 amid improving economic data in China and an apparent slowdown in coronavirus cases.
Some have also ascribed the surge to a degree of government influence. Earlier in July, a Chinese state-owned financial news outlet published a front-page editorial encouraging investors to participate in the “healthy bull market.”
So, can the rally be trusted?
Brendan Ahern, chief investment officer of KraneShares, which offers a suite of China-based exchange-traded funds, saw a lot to like in the Chinese market.
“They’ve effectively contained coronavirus. They’ve gone back to work without a cure, without a vaccine, and we’re getting that V-shaped recovery,” he told CNBC’s “ETF Edge” on Monday. “Stocks are anticipating that economic rebound.”
Another market watcher wasn’t so sure.
While there is reason for Ahern’s optimism given the speed of China’s recovery, the data might be telling a different story, said Dave Nadig, chief investment officer and director of research at ETF Trends.
“If you talk to the folks who are really doing on-the-ground research there, while things have improved in China, I don’t think it is quite the rosy picture that we’re going to see when China, say, drops their next GDP number,” Nadig said in the same interview.
“Everybody’s expecting that to suggest that, year over year, China’s claiming strong GDP growth. Nobody actually believes that that’s the case,” he said. “None of the deeper underlying data coming out is that good.”
Ahern — whose firm owns a majority stake in China International Capital Corp., a Beijing-based financial services company — vehemently disagreed, saying it was “ridiculous to say that the data doesn’t prove that we’re seeing a great rebound here.”
“High-frequency data shows China’s back to work, and it’s going to show up in earnings and markets are recognizing that,” Ahern said. “It’s 2020. I don’t need government data.”
He cited data from the Northbound Stock Connect, an exchange-style collaboration between Hong Kong and mainland China’s markets that allows foreign investors to buy into those markets.
The chart below compares buying in KraneShares’ Bosera MSCI China A Share ETF (KBA) with money going into the Northbound Stock Connect, which has seen $25 billion flow in year to date, Ahern said.
“U.S. investors have totally missed this rally. They’ve liquidated a lot of their China investments, they’ve been scared off by some of these headlines politically and they’ve missed this big rally,” Ahern said. “This Northbound Stock Connect, these flows, have been really, really strong.”
Nadig said the strength could be coming from investors who pulled money out of China at the start of 2020.
“A lot of money came out of China and emerging markets ETFs in the first half of this year,” Nadig said. “That money is coming back in spades. We had nearly $1 billion in inflows in China-driven EM and China-specific funds just last week. That actually moves the needle. So, there are favorable things there, but I am skeptical of the violence we’ve seen in this rally.”
“I think things are better, but nothing that would justify the sort of violent, 15% recovery we’ve seen in the market here,” he added. “We’ve suffered from some of this in the United States as well. Again, I’m not trying to be all sour here and suggest that everything’s going awfully. Valuations in China are still favorable. There are lots of reasons to like the China trade. But what we’ve seen very recently is so clearly a direct attempt to jawbone this market up that I’m skeptical of its long-term legs.”
Mainland China stocks fell slightly Tuesday despite better-than-expected trade data.
