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Escalating trade dispute sends ETF investors to cheap Chinese stocks

Investors poured cash into the largest ETF tracking Chinese stocks last week at a pace unseen in over three years as officials held talks on the trade dispute between China and the U.S.

The $4.7 billion iShares China Large-Cap ETF (FXI) took in more than $415 million over the five days, the most since May 2015. The fund tracks large-cap stocks, and its three biggest holdings are China Construction Bank, Tencent and Industrial & Commercial Bank of China.

Monday marks the final day of hearings on the Trump administration’s proposed tariffs on an additional $200 billion worth of Chinese imports, which may already be “baked into most market expectations,” Erin Browne, head of asset allocation at UBS Asset Management, said in an interview at Bloomberg’s New York headquarters.

Trade sentiment has pushed China stocks lower and created a buying opportunity.
An investor walks past an electronic stock board at a securities brokerage in Shanghai, China, on Friday, Oct. 13, 2017. A number of economic indicators show "stabilized and stronger growth" and the momentum of a 6.9 percent expansion in the first six months of 2017 "may continue in the second half," People’s Bank of China Governor Zhou Xiaochuan said. Photographer: Qilai Shen/Bloomberg

There were signs Monday, though, that the optimism may be overdone. After last week’s talks between U.S. and Chinese officials concluded, President Trump declined to comment on any progress, fueling speculation that the discussions did not go well.

Another China-focused fund, the $745 million Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) took in $46 million on Aug. 23, the largest one-day inflow in more than two years.

There also was some aggressive buying of call options in FXI and ASHR last week, as sentiment pushed China stocks lower and created a buying opportunity, said Christian Fromhertz, founder and chief executive officer of the trader education firm Tribeca Trade Group.

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Earnings from internet behemoths like Alibaba and Tencent may have also carved out an entry point for bargain buyers. Alibaba shares whipsawed after the company posted results, which came after a rout in tech stocks that featured Tencent’s biggest profit drop in a decade.

Investors in FXI could have done some “buy the news” trading after Tencent’s report, according to Dave Lutz, head of ETFs at JonesTrading Institutional Services.

“There’s relief earnings is over, which has them buying,” Lutz said.

Bloomberg News