ETF Edge

One trend among Chinese investors 'could really send this market higher,' China ETF issuer says

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What's next for Chinese equities, according to two market pros

It's all in the asset allocation.

As China's stock market continues its rapid recovery — a nearly 13% surge just since July 1 — one ongoing trend among Chinese consumers could help usher in a stable, long-term bull market, according to Brendan Ahern, chief investment officer at KraneShares, a China-focused ETF issuer. Its products include the KraneShares CSI China Internet ETF (KWEB) and KraneShares Bosera MSCI China A Share ETF (KBA).

"One reason I'm constructive on KBA despite this big rally is that we're coming out of kind of a five-year basing period for technical analysts that say that this is a breakout, and I think we're seeing this small shift in asset allocation within China," Ahern said on CNBC's "ETF Edge."

That shift in assets could be key in essentially growing the pie for Chinese market participants, Ahern said.

Only 4% of the average Chinese investor's household wealth is in stocks or mutual funds versus 29% for U.S. investors. Conversely, roughly 66% of Chinese investors' household wealth is in real estate, whereas for U.S. investors, it's closer to 26%.

But Chinese stock, mutual fund and bond ownership has been climbing in recent months, which could become a slow-yet-steady catalyst for the overall market, Ahern said.

"The 10-year Chinese Treasury ... was at 2.48% yield in April. Today, it's up over 3%," he said Monday. China's 10-year Treasury yield was still above 3% on Wednesday.

"You're seeing this shift within asset allocation, and just small, small movements of these big pools of assets ... could really send this market higher," Ahern said.

Dave Nadig, chief investment officer and director of research at ETF Trends, worried how the Chinese government's apparent influence over the market could impact it over the long term.

Some have said the recent surge was due in part to a front-page editorial in a Chinese state-owned financial news outlet encouraging citizens to participate in China's "healthy bull market."

"Part of the issue with how much can you trust the long-term rally here is will the Chinese Communist Party induce volatility by precisely what they're doing now, which is sort of trying to jawbone the market in different directions, trying to manipulate public opinion?" Nadig said in the same "ETF Edge" interview.

"Over the long term, that tends to not actually be that useful or helpful because the economy itself is going to be the economy," he said. "Goods and services are going to be produced and consumed, and at the end of the day, that's all that really matters. And that is, I think, still very much a bull case for China, and funds like KWEB that have sort of been at the front end of this transition towards a more service-based economy, towards a more local-based economy as well. I think those are phenomenally great ways to make those long-term plays."

KWEB was flat in Wednesday trading and has climbed over 37% year to date. KBA fell 1% Wednesday but held onto a 22% gain for the year.

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