Buy the China Dip? Neuberger Berman Launches China ETF

Liam Gibson

Investors who remain bullish on companies in China have a new exchange-traded fund (ETF) to consider. 

The New York-based, employee-owned fund manager Neuberger Berman has converted its China-focused mutual fund into an ETF. From Monday, October 16, the Neuberger Berman China Equity ETF (“NBCE”) trades on the New York Stock Exchange Arca.

NBCE is an active fund that uses a research-based approach to allocate its portfolio. The ETF will invest mostly in China-A Share equities, Chinese companies listed in Hong Kong, and American Depository Receipts (ADRs). It will select firms with robust balance sheets, potential for return on capital, and exceptional earnings growth. 

Neuberger claims its team of investment professionals “bring together deep market expertise, innovative data science capabilities, and strong corporate engagement tools to manage these investment solutions.”

Still in the Red?

China has been a disappointing destination for investors this year. The leading MSCI China Index – which tracks around 85% of the China equity ecosystem – has stumbled over 10% year-to-date. 

The Chinese economy is in serious trouble. As its multi-decade supercycle comes to an end, deeper stagnation could set in. This month, the IMF and World Bank flagged China's deepening property crisis as one of the biggest risks to global growth. Spiraling debt, declining imports and exports, and high youth unemployment are all adding to the country's woes. Bank of Japan officials warn Beijing about the risks of “Japanization” – alluding to their own country's sustained multi-decade economic stagnation. 

While the U.S. struggles to contain inflation and cool a still piping-hot economy, Beijing is working hard to breathe life into its system as China goes through a sluggish recovery following its harsh zero-Covid lockdowns. The economy slipped into a deflationary zone this year before consumer prices returned to positive territory in August, per data released by China's statistics bureau. This could hint at a stabilizing scenario, although consumer demand remains weak.

“China has reached the end of the road of its debt-fuelled growth model and faces a prolonged period of painful adjustment, which we describe as a ‘slow-motion real economy crisis',” says Diana Choyleva, head of London-based Enodo Economics.

Enodo estimates credit losses of around 40% of GDP in 2023, up from roughly 28% last year. The firm believes the tech, real estate, and consumer sectors will be the hardest hit.

This paints a bleak picture. However, there is a possibility investors have become overpessimistic about China's outlook, making its stocks potentially oversold. The latest economic data from the country shows China's economy grew by 4.9% year-on-year in the third quarter, beating market expectations. 

For those who see a full recovery in China as inevitable, NBCE may be a suitable vehicle by which to ‘buy the dip.'NBCE currently trading around the $24 mark. For those that do not, you can always go with a simple ETF like SPY or VOO.

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