Investors in Chinese stock exchange-traded funds have needed grit in recent weeks. Spooked by the war in Ukraine, anxiety over regulatory crackdowns and the outbreak of the coronavirus in China, they are in no mood to hear more bad news.

So on March 10, investors freaked out when the U.S. Securities and Exchange Commission listed five New York-listed Chinese companies as the first of 270 to face delisting without providing audit documents.

The $6.5 billion KraneShares CSI China Internet ETF (KWEB) lost about 10% of its value each day for the next three days. Then on March 16, a speech Chinese Vice Premier Liu He’s pledge to introduce “market-friendly policies” led to a flood of funds, and KWEB responded by surging 40% in one day.

Investors in the $760 million EMQQ The Emerging Markets Internet & Ecommerce ETF, which has 51.6% exposure to China, also experienced a setback — at one point falling to a third of the all-time high set in February last year.

“This was probably the darkest day of my career,” said Kevin Carter, founder and chief investment officer of EMQQ.

Like KWEB, EMQQ also rebounded, rising more than 24% in the day after Liu’s speech.

But the gains each ETF has made have not been enough to make up for all the losses suffered over the past year, and investors have also had to weather fears of a slowdown caused by new harsh lockdowns across China, including in big cities like Shanghai and Shenzhen .

For example, EMQQ had $1.9 billion in assets under management at the end of February 2021.By the end of February 2022, this figure had dropped to $811 million, currently $731 million March 28.

Carter insists that the basic idea of ??investing in emerging-market Internet and e-commerce companies in developing countries, including China, remains unassailable. He said total revenue growth for EMQQ-invested companies is 35% in 2021 and believes 2022 should be a strong 20%.

Chen Xiaolin, head of KraneShares International, pointed out that the problem is that investors are currently not interested in the fundamentals of what is happening in China and are focusing on the macro situation.

Analysts at JPMorgan agree. The potential delisting of Chinese companies’ American depositary receipts was the catalyst for the waning sentiment, not the root cause, analysts said in a report on Chinese internet investment published in mid-March at the height of China’s stock market rout.

“We believe the SEC announcement has triggered a reassessment of geopolitical risks in China, leading to massive outflows from the internet sector as global investors rebalance their global capital allocations,” the analysts wrote.

Rather than “doubling down” and adding to Chinese internet companies at lower valuations, JPMorgan said that while it believes shares will be driven by fundamentals in the long run, “we recommend investors to buy Avoid the Chinese internet for 6-12 months.”

Both KWEB and EMQQ focus on tech and internet-related investments that have been particularly hard hit by the full-blown outbreak in China Regulatory crackdown in the technical field. In addition, all of their Chinese holdings are in overseas-listed securities.

“All of this has the most impact on what I call ‘offshore’ China — American depositary receipts traded in the U.S. and shares of Chinese companies listed in Hong Kong — because these big consumer tech companies are in China The regulatory crackdown is mostly overseas listings, and Chinese ADRs face the additional threat of being delisted by U.S. regulators. A shares.

He said that in the four weeks to March 28, about $9.2 billion had flowed out of Chinese stocks through the Shanghai-Hong Kong Stock Connect program, which allows foreign investors to buy mainland stocks. That compares with an average monthly net inflow of $4.8 billion over the past 12 months.

The question for all offshore Chinese investors is whether investors should avoid Chinese equity ETFs, at least in the short term.

Fundamentally, “the story hasn’t changed much at all,” Carter said. He pointed out that e-commerce and internet penetration rates in developing countries are still much lower than in developed countries. Meanwhile, in 2021, for the first time in the history of EMQQ, the number of non-Chinese companies will exceed the number of Chinese companies. “This trend is likely to continue,” he said.

Wool warned that there are “value traps” — companies whose fundamentals are truly damaged by policy shifts or macroeconomic and geopolitical challenges.

But he believes bargains can now be found, especially in fast-growing companies in “boring” sectors such as industry or materials, and high-quality state-owned enterprises that would benefit from China’s push for “shared prosperity”.

However, Brendan Ahern, chief investment officer at KraneShares, said that despite the early optimism following Liu’s remarks, it seemed unlikely that the issues raised by the audit document requirements would be resolved sooner rather than later.

“What got us here is what got us out of here: regulatory policy,” Chen said.

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