(Bloomberg News) The biggest Chinese exchange-traded fund in the U.S. is losing money faster than any other country-focused ETF, even as the lowest valuations since 2008 convince brokerages in the Asian nation that it's time to buy.
Investors pulled a net $961.2 million from the iShares FTSE China 25 Index Fund this year, the most among 140 single-country ETFs that trade on U.S. markets, according to data compiled by New York-based research firm XTF Inc. The outflows coincided with a decline in the Shanghai Composite Index's price-earnings ratio using estimates for the next year to 11.6, a valuation last seen during the financial crisis in November 2008.
Valuations in the Shanghai Composite slumped after the country's central bank raised lender reserve requirements 12 times since the start of 2010 and increased benchmark interest rates for the fourth time. The People's Bank of China is tightening monetary policy to curb inflation, which climbed to the highest level since July 2008 in May.
"China's been too popular and money's starting to flow out," said Kenneth Fisher, who oversees $44 billion as chief executive officer of Woodside, California-based Fisher Investments Inc. "It's outside China where the interest has been focused and primarily in America. People were tripping over themselves to get into Chinese equities and now, they're starting to get scared."
Mainland brokers say that the lowest multiples since economic growth collapsed three years ago will lift equities. Beijing-based Citic Securities Co., the nation's largest brokerage, and China International Capital Corp. both predict the Shanghai Composite will rally in the second half as the government sustains economic growth by easing monetary policy.
U.S. investors aren't convinced. FXI, which is listed on the New York Stock Exchange's Arca platform, fell 0.3 percent in 2011 through last week amid concern the country will struggle to control inflation, as well as increased regulatory scrutiny following accounting problems of Chinese companies listed in North America. The China-linked security tracks China's largest 25 stocks on the Hong Kong exchange.
At the same time, money managers in the U.S. are favoring the world's second-biggest emerging market, pouring money into the largest Brazil ETF. About $1.43 billion went into the iShares MSCI Brazil Index Fund this year. The Shanghai Composite Index has advanced 0.3 percent in 2011, while Brazil's Bovespa index has retreated 8 percent.
"It's certainly counterintuitive because you're used to thinking that performance drives money flows in and out," said Nicholas Colas, the New York-based chief market strategist at BNY ConvergEX Group LLC. "China is raising interest rates and that's caused money flows out of the country, while the underlying index has been generally fine. It's declined but it's not like it's down 10 percent."