Korean funds investing in China face negative returns amid property crisis

China’s largest real estate company Country Garden on brink of bankruptcy. [Photo by Yonhap]

As the recent real estate crisis in China dampens hopes of a stock market rebound, South Korea’s related funds that invest in the Chinese market have also seen lackluster long-term returns.

According to fund evaluator FnGuide on Wednesday, Korean funds investing in China recorded an average return of -28.18 percent over the past three years in contrast with funds targeting North American markets that posted an average return of 41.39 percent. Funds focused on regions benefiting from the China exit, such as India (83.79 percent) and Vietnam (51.09 percent), as well as funds targeting advanced economies like Japan (37.41 percent) and Europe (22.08 percent), also performed well. The only other funds with negative returns besides those for China were related to Russia (-39.30 percent) and BRICS (-24.80 percent).

Among Chinese market funds, leveraged funds, which aim to double the index’s daily returns, saw their three-year returns plummet to nearly -70 percent. During the same period, the “KODEX China H Leverage (H)” ETF, recorded a return of -68.09 percent as the Hang Seng Index in Hong Kong declined by more than 30 percent. Other leveraged funds such as “Mirae Asset China H Leverage 2.0 C4” (-67.41 percent), “Hanhwa China H Speed Up 1.5x C1” (-51.90 percent), and “Feynman China Bull 1.5x C1” (-51.40 percent) also showed dismal returns. Analysts attribute this decline to the pressure from last year’s interest rate hikes and the current Chinese real estate crisis.

“The Chinese economy is currently in a macroscopically unstable state due to real estate market slump and deflation concerns in the third quarter. This is interconnected with the depreciation of the yuan and domestic economic stagnation,” Daishin Securities analyst Cho Jae-woon said.

China market funds initially garnered attention as they steadily rose in value after the onset of the Covid-19 pandemic until February 2021. Between early 2021 and early 2022, the total assets under management for China market funds increased by around 1 trillion won ($750 million), exceeding 6 trillion won.

However, this trend reversed as the Chinese economy failed to recover as quickly as expected this year, compounded by the crises involving major property development companies like Evergrande and the potential risk of non-performing loans.

With reduced investor interest due to concerns about China fund losses, newly launched Chinese investment ETFs have been limited to just three this year: “KBSTAR China Mainland CSI 300,” “TIGER China Electric Vehicle Leverage (Synthetic),” and “KOSEF China Domestic Consumption TOP CSI.” This is in stark contrast to the active releases of China market funds from the end of 2020 to last year.

North America market funds, on the other hand, rebounded this year thanks to the rise in big tech stock prices, despite a decline in returns last year. Particularly, over the past three years, “KBSTAR US S&P Oil Producers ETF (Synthetic H)” and “KODEX US S&P 500 Energy ETF (Synthetic)” posted impressive returns of 215.37 percent and 190.68 percent, respectively. These ETFs include portfolio companies like ExxonMobil, which enjoyed record profits as international oil prices rose, resulting in strong stock performance.