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China ETFs Getting Pounded Amid Government Crackdowns

KWEB, for instance, is more than 50% off its year-to-date highs.

The biggest enemy of Chinese stocks right now is the Chinese government itself.

What started with a focus on mostly big Chinese tech names, such as Alibaba (BABA), Tencent (TCEHY) and (JD), has spread into virtually all areas of the country's economy. The government this week went after the education industry by forbidding them from making a profit and raising money in the capital markets. It joins the tech, retail, real estate and commodities industries as recent targets.

As of this morning, the iShares MSCI China ETF (MCHI) is down more than 30% from its February peak. The KraneShares CSI China Internet ETF (KWEB) is down 55% over the same time period.

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When Does The China Crackdown End?

The biggest concern now is that no one is really sure how or when this will end. Many market watchers priced in the risk of regulatory pressures on the tech sector, but nobody really anticipated that this was going to be so widespread, which is why we've seen such sharp losses over the past several trading days.

I plugged KWEB a few weeks ago in my "2 To Buy, 1 To Avoid" columns on the belief that the worst was priced in and the group looked like a potential buy low opportunity. That turned out to be incorrect as the regulatory risk now appears more widespread than originally thought. If you're holding China stocks today, they're probably worth holding since most of the damage is already done and there's the possibility of an oversold bounce if we get the sense that the Chinese government may give things a rest. I'd hesitate to make a big bet on it at the moment though.

China ETFs Get Pummeled

The damage to China ETFs has been widespread. MCHI is down about 15% over the past month, but several sectors within the country have had a much rougher time.

China ETFs; source: ETF Action

China ETFs; source: ETF Action

I've already mentioned KWEB's problems. It's the worst performing China ETF having lost nearly 30% over the past month. The Invesco Golden Dragon China ETF (PGJ) and the KraneShares Hang Seng Tech Index ETF (KTEC) are other broad China ETFs that have lost more than 20%.

The WisdomTree China ex-State Owned Enterprises ETF (CXSE) is an interesting inclusion on this list. As the name suggests, the exclusion of companies with heavy government ownership was supposed to up the growth potential of investing in China, but, of course, the opposite has happened here. It's down 16%.

Healthcare is one of the biggest sector losers. The Global X MSCI China Healthcare ETF (CHIH) and the KraneShares MSCI All China Health Care Index ETF (KURE) have both posted deeper than average losses. The Global X MSCI China Communication Services ETF (CHIC), the Global X MSCI China Real Estate ETF (CHIR) and the Invesco China Technology ETF (CQQQ) demonstrate the sectors which have been hit especially hard.

The only China equity ETFs to post gains over the past month are the Global X MSCI China Materials ETF (CHIM), which is up 6%, and the Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS), which has returned less than 1%.

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