[SINGAPORE] Gains in Chinese stocks have typically filtered through to bolster their emerging-market counterparts – not this time.
Mainland equities have surged over the past six months, breaking free of a multi-year slump, while broader developing-nation equities have largely flat-lined. The divergence is being put down to the fact Chinese gains are being driven by a tech frenzy, rather than an improving economy that would filter through to other economies via the nation’s extensive trade links.
China’s outperformance is “driven by a specific tech-driven boost to spending more towards the consumer away from investment, and it’s very unlikely to have large spillover impact to the rest of emerging markets (EM),” said Manik Narain, head of emerging-market strategy research at UBS Group in London. “This is not the classical Chinese playbook of 2009, 2016, 2020 that ultimately morphed into deported EM recoveries.”
The MSCI China Index has jumped more than 30 per cent since the end of August, while a gauge of equities in emerging markets excluding the nation has dropped almost 7 per cent. That’s a stark contrast with at least two historical periods when gains were in tandem: Chinese shares rose 63 per cent in 2009-2010 and a broad gauge of EM shares climbed 103 per cent, while China stocks advanced 50 per cent in 2016-2017 and the EM-wide gauge rallied 46 per cent.
Chinese stocks initially jumped last September due to optimism over additional economic stimulus, but those gains were largely unwound as policy announcements proved underwhelming. It was only the release of a new artificial-intelligence (AI) model from DeepSeek in January that finally set off a more enduring rally.
The current divergence between Chinese shares and their EM peers can be seen in investing flows too. The KraneShares CSI China Internet Fund, one of the largest exchange-traded funds tracking China, has seen an inflow of US$1.5 billion this year, while the iShares MSCI Emerging Markets ex China ETF was set for one of its few monthly outflows since 2022.
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The revival of investor optimism towards Chinese shares is due to broader reasons than just the tech industry and the nation’s equities may continue to generate better returns than other emerging markets, according to Vincenzo Vedda, chief investment officer at DWS International in Frankfurt.
“There is more and more optimism all over the country, and the ailing real estate market seems to have bottomed out although not turned around yet,” he said. “We assume that China’s outperformance of other EMs, which we have observed since mid of January, is here to stay.”
There’s at least one big risk threatening to stall the Chinese stock rally, and add to the losses in other emerging markets: the threat of higher US tariffs.
Investors across the world are nervously awaiting US President Donald Trump’s announcement of so-called “reciprocal tariffs” on Apr 2. Trump added to growing concerns this month by announcing 25 per cent levies on auto imports. China is especially vulnerable due to its high dependence on trade with the US, and has often been singled out for criticism by Trump and other senior members of his administration.
Some funds at least are already reducing their Chinese holdings.
“After adding to Chinese equities during 2024, many of our funds have been trimming some holdings that have appreciated in value this year,” said Rohit Chopra, a portfolio manager at Lazard Asset Management in New York. “Our funds are slightly less exposed to, or underweight, China.”
Others are more upbeat, but also say China’s decoupling from the rest of EMs may diminish once the Federal Reserve progresses with its easing cycle.
“We do expect better flows to EM in general this year as the Fed will resume its path of interest-rate cuts,” said Wim-Hein Pals, head of emerging markets at Robeco Institutional Asset Management in Rotterdam. “If the Chinese economy improves further, the positive sentiment and numbers might start filtering through to other Asian nations more than in the recent past.” BLOOMBERG
