Japan-centric Stocks Lure Chinese Investment Amid Skyrocketing Nikkei, Prompting Risk Advisories

Chinese investors are exhibiting escalating interest in Japan-focused equity funds, as the Nikkei Index soars to peaks unseen in over three decades. However, this growing enthusiasm has led fund managers to issue consecutive alerts about potential market hazards.

Both E Fund Management Co and China Asset Management Co (ChinaAMC), the managing companies of two Shanghai-traded exchange-traded funds (ETFs) tied to the Nikkei 225 Index, have noticed such an intense interest that the ETFs' market prices have significantly surpassed their underlying net asset value. This unusual divergence prompted the firms to alert investors about the inherent risks in a statement issued for the third consecutive day on Tuesday.

They urged investors to be vigilant about "price premium risks in the secondary market." They further cautioned, "Rash investments could result in significant losses."

With a 19% growth recorded this year, the Nikkei is currently appealing to foreign investors, thanks in part to robust corporate profits and a promising economic recovery. Chinese investors, specifically, have been injecting substantial capital into a select group of ETFs that focus on Japanese stocks under the Qualified Domestic Institutional Investor (QDII) program.

Among these funds, the Hua An Mitsubishi UFJ Nikkei 225 ETF (513880.SS) has been particularly popular, more than doubling its assets under management this year to CNY 123.5 million ($17.52 million).

This heightened demand is further evidenced by the price premiums for these ETFs, which can be traded similarly to individual stocks. The premium for the E Fund Nikko AM Nikkei 225 Index ETF (513000.SS) surged to 23% last Friday before subsiding subsequent to the fund manager's risk warnings. Concurrently, the fund's size has increased nearly 60% this year.

Similarly, the China AMC Nomura Nikkei 225 Index ETF (513520.SS) saw its premium in the secondary market inflate to 18% on Friday, reinforcing the rising interest from Chinese investors in Japan-focused funds.