U.S. investors may be partly exiting Chinese equity funds after reports that companies from Longtop Financial Technologies Ltd. to Sino-Forest Corp. were exaggerating operations, Colas said.
Inflation, Accounting
"The fundamental problems China has -- controlling inflation, its monetary policy -- are more important drivers but it can't help," he said. "It's definitely a concern. Accounting is always a concern."
While investors have grown bearish on China, the outflows for FXI may be also driven by a decline in short interest in the country's equities, according to Lichtenstein and Colas. The short-interest ratio for FXI sank to 1.42 on June 15, the lowest level in more than a year and after rising to a record 3 in February, according to New York Stock Exchange data.
Large orders of ETFs are made through authorized agents who purchase blocks of the underlying holdings and trade them with the fund to create new shares. Investors betting on declines may still need to create shares of the ETF in order short the funds.