China Stocks Plunge: Should You Buy the Dip With ETFs?

Mainland China stocks tumbled on Wednesday, marking the end of a 10-day rally, as the stimulus-induced rally faded. On Tuesday, mainland Chinese stocks, including those listed in Shanghai, Shenzhen, and Beijing, experienced volatile trading after returning from a week-long holiday. The A-share market saw record turnover, reaching 3.485 trillion yuan ($493.17 billion) on Tuesday. In contrast, Hong Kong stocks struggled.

Stimulus Expectations Falter

According to Alvin Tan, head of Asia FX strategy at RBC Capital Markets, "The market is widely anticipating a fiscal stimulus announcement this month, in the range of 2-3 trillion yuan”, per Reuters, as quoted on Economic Times. Without a package of that size, sentiment quickly wavered.

Investors should note that on Sept. 24, 2024, China's central bank, the People’s Bank of China (PBOC), announced a broad range of monetary stimulus measures aimed at boosting the world's second-largest economy. The measures goaded the rally.

Economists Warn of Long-Term Challenges

Samuel Tse, an economist at DBS, noted that "the impact of support measures will take time to materialize," as quoted on the above-mentioned source. He emphasized that lasting recovery in property and consumption, particularly in tier 2 and 3 cities, would require additional stimulus and a more sustained positive effect from the equity market.

Should You Buy the Dip?

The market sentiment has improved recently with a pick-up of the purchasing managers' index in the manufacturing sector, an upbeat stock market and a vital consumption market during the National Day holiday, following the implementation of existing policies and incremental policies unveiled recently, Zheng Shanjie, head of the National Development and Reform Commission (NDRC), told a press conference. China also said on Tuesday that it was "fully confident" of hitting its growth target this year.

But then the World Bank estimates that China’s growth rate will decline to 4.3% next year from the projected 4.8% in 2024, in an economic update on Tuesday, as quoted on CNBC.  While the 2024 figure is up from forecasts in April, the 2025 rate remained unchanged due to doubts over the long-term impact of Beijing’s recent stimulus measures.

The World Bank held weak Chinese consumer spending, ongoing property market weakness, an aging population and rising global tensions responsible for the subdued estimate for 2025. The World Bank believes that the region will need to find more domestic drivers of growth as China slows down.

China ETFs in Focus

Against this backdrop, below we highlight a few China-related exchange-traded funds (ETFs) that have a lower P/E in the China ETF space. These ETFs have higher chances of future outperformance due to a cheaper valuation.

SPDR S&P China ETF GXC – P/E 10.38X; Up 1.5% Past Week (as of Oct. 8, 2024)

iShares China Large-Cap ETF FXI – P/E 10.62X; Up 0.7% Past Week

Franklin FTSE China ETF FLCH – P/E 10.87X; Up 0.9% Past Week

iShares MSCI China ETF MCHI – P/E 10.89X; Up 0.5% Past Week

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