The ETF Mirage: Why "China" and "India" Holdings Aren't Tracking Their Economies
How institutional distortion, AI hype, and state-policy transmission are warping the signals in your EM portfolio
In the market momentum note that I published on the Leverage Shares website (and which will be a weekly feature going forward), firm-wide Exchange Traded Product (ETP) traded volume dynamics in the Year Till Date (YTD) showed a distinct variation by exchange all across Europe: the LSE in the United Kingdom is by far the deepest and most liquid of the three exchanges with average daily volumes (ADVs) across the entire year being twelve times that in Germany’s XETRA and five times that in Italy’s Borsa Italiana (BITA). LSE also has the largest breadth of Leverage Shares products while XETRA has a little over half as much and BITA has half of XETRA’s. Across all three exchange with distinct aggregate investor sentiment, the current week is shaping up to be the highest-volume week in the year — a genuine geopolitical shock of multi-generational consequence is poised to simultaneously validate every defensive product that had been building momentum through February and early March, while potentially adding an entirely new energy commodity impulse on top of them.
What some market observers might find interesting is that ETPs built on Indian and Chinese names aren’t very active in terms of overall ADV share:
While the “buy India, diversify into China” mantra has increasingly become a staple of global asset allocation, the volume trends suggests a sophisticated hesitation. Investors are beginning to recognize a critical “Tracking Error of Narrative”. These instruments aren't representative vehicles for the broad economic momentum of these two giants. While the “India” and “China” labels on these instruments serve as marketing shorthand, they provide exposure to specific legacy sectors that often leave real drivers of domestic economic narratives entirely out of the frame.
The Beijing Paradox: When Tech Policy Outruns the Consumer
As outlined in a previous Substack article, China's actual 2025 GDP growth is considered to be short of the official projections of 5%. For 2025 as a whole, consumer prices were flat overall, and Beijing has now set its 2026 consumer inflation target at “around 2%” (the lowest level in more than two decades), effectively acknowledging that this is more a ceiling they'd be pleased to reach than a floor they can take for granted. Home prices in China have been falling for four and a half years — a household wealth destruction on par with America's 2008 crash, except it's still accelerating. Consumer confidence, investment, and domestic demand have cratered with it.
Besides real estate, factors contributing to deteriorating sentiment include high youth unemployment, worsening conditions in consumer durables, and — crucially — the perceived doubt among households that Chinese authorities are capable of finding effective solutions to a confluence of crises in a feedback loop. While Beijing might have the means to prevent a crisis, the 21st Party Congress is looming in 2027 and Xi Jinping will prioritise political control and technological supremacy over the consumption stimulus and structural reforms that could actually break the cycle.
Leverage Shares’ “China Broad” products are built on the iShares MSCI China ETF (MCHI), wherein top holdings are Tencent at around 16%, Alibaba at around 10, China Construction Bank at under 4%, while Xiaomi and Pinduoduo Holdings account for under 3% each. Top 10 holdings account for over 43% of the fund across 586 total holdings. Here is the central analytical problem: neither Tencent nor Alibaba’s revenue model (who together constitute 26% of the fund) primarily measure Chinese domestic consumer sentiment in the way the label “China ETF” implies.
Tencent’s cloud and enterprise services revenue is growing partly because Beijing is pushing corporate China to onshore its tech infrastructure — a geopolitical mandate, not a consumer confidence story. While it derives revenue from digital entertainment and fintech (WeChat Pay), its core platform’s stickiness is recession-resistant but not a guarantor of revenue growth when consumer spending confidence is low.
While Alibaba’s Taobao and Tmall segments are direct consumption proxies, its Cloud division’s rapid growth is driven by enterprise AI adoption and Beijing's tech self-reliance mandate. Alibaba thus is increasingly a cloud/AI infrastructure company that happens to also run China's largest marketplace — and cloud infrastructure revenue is policy-driven and enterprise-driven, not consumer-sentiment-driven.
MCHI also includes China Construction Bank and several other state-owned banks and insurers. These SOEs (“state-owned enterprises”) aren’t consumer sentiment vehicles at all — instead, they are policy transmission mechanisms, responding to central bank decisions, government bond issuance mandates, and directed lending programs. When Beijing wants to stimulate the economy by expanding credit, bank stocks can rally even as household confidence craters. Thus, MCHI could potentially rise despite the average Chinese consumer’s lived experience deteriorating.
Leverage Shares’ “China Tech” products are built on the KraneShares CSI China Internet ETF (KWEB), a cleaner thematic product which, in some ways, is more honest about what it is. KWEB offers pure-play exposure to Chinese software and information technology stocks — Chinese analogues to the likes of Amazon and Facebook, among others. It only invests in overseas-listed shares, primarily in the US and Hong Kong, which means it misses mainland China’s A-shares entirely.
While KWEB’s top holdings overlap with MCHI — including Tencent, Alibaba, Pinduoduo, and Meituan — but without the financial sector and state-owned enterprise exposure, its universe of Hong Kong shares and ADRs has its price set by international investors trading in international markets, with international liquidity dynamics. What moves KWEB is global risk appetite toward Chinese tech, US-China regulatory tensions affecting ADR listings, Hong Kong market liquidity, and the AI narrative as understood by fund managers in New York, London, and Frankfurt. It is, in a real sense, a product that reflects international opinion about Chinese tech more than it reflects the health of the Chinese domestic internet economy.
KWEB is up over 26% YTD as of early March — a striking performance that is almost entirely explained by the DeepSeek/AI moment and the associated global re-rating of Chinese tech, not by any improvement in domestic consumer confidence or spending. While specific companies in KWEB such as Meituan (food delivery), JD.com (e-commerce), Trip.com (travel), and Kuaishou (short video advertising) are real consumption proxies, distortion runs deep here. Domestic demand showed sectoral divergence, with services consumption holding up better than goods consumption. In other words, food delivery and travel can grow even while broader consumer confidence is depressed and goods spending is weak. These companies have also been aggressively cutting costs and improving margins under regulatory pressure to become profitable, meaning their earnings are rising not because Chinese consumers are spending more but because the companies are becoming leaner.
Why Your India Bet is Actually a US Tech Proxy
Leverage Shares’ “India” products are built on the iShares MSCI India ETF (INDA). INDA’s sector allocation is led by Financial Services at nearly 30%, with HDFC Bank at around 8% and ICICI Bank at around 5%. Indian banks are domestically driven credit cycle stories — their performance is tied to central bank rate policy, loan growth, NPA (“Non-Performing Asset”) cycles, and domestic consumption. What this means in practice for Western investors accessing Leverage Shares products is: if attempting a bet on India’s IT sector, infrastructure boom, or geopolitical positioning as a trade war beneficiary, INDA becomes a highly diluted proxy.
India’s IT services complex, which accounts for roughly 10–12% of the fund, also presents a complex story. Their performance is therefore substantially correlated with US tech capex cycles, the dollar/rupee exchange rate, and US corporate IT budgets — not with the Indian domestic economy. When Nasdaq sells off, Indian IT stocks often sell off in tandem, meaning INDA carries embedded US tech beta. INDA thus becomes partially a bet on US tech spending sentiment — yet another layer of distortion removed from what the label suggests.
Reliance Industries, a single-name conglomerate with a market capitalization at approximately ₹19 lakh crore (~$230 billion), is INDA's second-largest holding at approximately 6% of the fund. The company spans oil refining, petrochemicals, telecom and retail — with each segment responding to very different macro forces. Reliance has a long-term deal with Russia’s Rosneft tied to purchasing up to 500,000 barrels/day for its 1.4 million barrel-per-day Jamnagar complex — often described as the world's largest refinery. Indian refiners including Reliance Industries are actively redirecting diesel and jet fuel shipments to Asia, leveraging strong margins as the Iran war drives global crude supply disruption. When Brent spikes, Reliance's O2C (oil-to-consumer) segment benefits directly through improved gross refining margins, while simultaneously its Russian crude discount advantage may narrow due to compliance pressures. The net result: two narratives — “India macro hurts from oil shock” versus “Reliance benefits from oil shock” — are pulling in opposite directions inside the same underlying ETF.
Approximately 45-55% of INDA covers industrials, consumer discretionary, healthcare and perhaps something genuinely resembling “India macro”. This has implications for the ETP volume trends in the YTD: while XETRA participants — potentially more retail-oriented — are seeing the India label and buying the AI/emerging-market growth narrative, LSE participants — more institutional — are looking through the label, recognising the financial-sector concentration plus the INDA technical breakdown, and hedging. Neither group is making a clean call on India: both are trading a product that, by construction, delivers something considerably more complex than its name implies.
China’s Retail Frenzy and the Search for Exit Ramps
Daily turnover across the Shanghai, Shenzhen and Beijing stock exchanges climbed to successive record highs in January 2026, with trading volume peaking at 3.99 trillion yuan on one day, surpassing the previous record of 3.48 trillion yuan set in October 2024, and representing a steady growth in volume throughout 2025. Retail investors account for about 90% of daily turnover in China's onshore stock markets, which contrasts sharply with major overseas markets: for instance, retail investors make up only around 20-25% of volumes on the New York Stock Exchange. The prime driver behind this dynamic within China’s onshore “A-Share” market is the collapse of China’s property sector and leading China’s market regulators to grow in nervous. In January 2026 — while suggesting an “overheating” of activity and sentiment — the margin requirement for credit purchases was lifted to 100% from 80%, which essentially eliminates new leveraged margin trades and directly attempts to target retail speculative excess.
The rotation of domestic capital from property and deposits into financial assets at an accelerating pace is the policy intent of Beijing's “wealth effect” strategy that aims to substitute equity appreciation for the real estate wealth engine that has collapsed. The overheating of the “A-Share” has been leading to three “exit ramps” by those investors who can afford it:
Southbound into Hong Kong: In 2025, daily southbound buying via Stock Connect exceeded HK$ 200 billion per day, making up one-third of total liquidity in the Hong Kong market. Mainland retail and institutional money are now buying H-shares, Hong Kong-listed tech (e.g. Tencent, Alibaba, Meituan), and Hong Kong-listed international ETFs — a trend that Nomura suggests will only strengthen.
Gold: China's domestic gold market consumption reached more than 505 tons in the first half of 2025 and went on to accelerate via a number of avenues. This is a safe-haven and currency-hedge trade: gold has become the primary store-of-value alternative for households that distrust Chinese equities’ volatility in both onshore and offshore markets but equally distrust the property market’s liquidity.
Outbound real estate and direct investment: This is the revealed preference of upper-middle-class Chinese investors who have the means to move capital: get out of RMB-denominated assets entirely if possible and get into Southeast Asia (Thai condos, Vietnamese industrial parks, et al), Japan (cheap real estate in RMB terms), and the United Arab Emirates (zero-tax, crypto-linked assets, etc).
How India’s Domestic Capital is Front-Running the World
The Indian equity market has, for about three years now, been witnessing a structural tug of war between Foreign Portfolio Investors — also referred to as “FPIs”, a catch-all term that includes Foreign Institutional Investors (FIIs), individuals, trusts, and asset management firms trading in the short- to medium-term — and domestic investors. While total FPI outflows in 2025 reached ₹1.55 lakh crore (“lakh crore” = “trillion”) by December, selling was not uniform across sectors — IT was the worst-hit sector, witnessing a massive net FPI outflow of ₹74,698 crore over the year, while telecom was the clear leader with a net inflow of ₹48,222 crore, with positive flows in almost every month including periods of sharp broad selling. This sector divergence is itself a signal: FPIs are not fleeing India categorically, they are rotating out of richly priced growth exposures and into dividend-yielding, rupee-insensitive infrastructure plays.
In the current year, domestic investors have been expanding their hold over India Inc. In January 2026, domestic institutions bought nearly ₹40,000 crore worth of equities, exceeding FII selling of around ₹25,000 crore. DII (“Domestic Institutional Investor”) buying exceeded FII selling, helping the market remain relatively stable despite foreign outflows. Domestic mutual funds saw their share of domestically-listed company ownership climb to a record 10.9%, supported by persistent SIP (“Systematic Investment Plan”) inflows and steady equity buying, marking the ninth straight quarter of record mutual fund ownership of India Inc.
This is a structural regime shift: DIIs outpaced FPIs for the fourth consecutive quarter, a streak last seen in 2003. As of early March 2026, India’s mutual fund industry continues to report monthly SIP inflows above ₹30,000 crore, reinforcing steady domestic participation even as equity markets navigate volatility. Herein lies the dichotomy that Western investors see when considering INDA: it is an international vehicle tracking an international price, not the rupee-denominated domestic market that DIIs are actually buying into.
Trading Labels in a Multi-Polar Market
The structural divergence between India and China’s domestic investor base is stark: Indian domestic investors are buying India with conviction — ₹30,000+ crore monthly, sometimes robotically through SIPs, and as net buyers even as FPIs exit. Rather than capturing domestic sentiment, INDA captures international sentiment about FPI momentum, INDA's technical breakdown, and the rupee (wherein governance mechanisms are built around attracting homegrown economic activity initiation) which does not exist in INDA’s pricing mechanism. Furthermore, a recent spate of free trade deals clinched by India around the world (the European Union, Australia, New Zealand, et al) primarily benefit manufacturing exporters, pharmaceutical companies, and select consumer goods names — which are lower-weighted in the fund versus the financial and energy heavyweights — that are entirely beneficial to the domestic economy.
Meanwhile, China’s exit-ramp activity implies that conviction in domestic RMB equity as a long-term store of value is not deep; instead, it is a momentum and policy-support trade, not a fundamental bet on Chinese consumer recovery. The southbound flow, i.e. the domestic Chinese expression of the same Alibaba/China Tech thesis that Western participants are expressing through KWEB creates a warping of convictions — while being in the same trade using different wrappers, they’re arriving from different directions. Neither MCHI nor KWEB captures either one cleanly, because neither products track the A-share market where the retail frenzy is actually occurring. However, what does support tech-heavy overall conviction in MCHI and KWEB is Beijing's 15th Five-Year Plan, which explicitly centres around technological self-reliance. In the midst of the AI Hype and the hunt for more investment choices, Chinese tech platforms are increasingly re-rated to being structurally undervalued relative to their AI capabilities, which boost the outlook for these instruments regardless of what the domestic consumer is doing.
Among Europe’s exchanges, LSE has been driving volumes across the range of both India and China products — while XETRA has recently shown particularly strong participation in interest over the India products:
While German investors might be betting on 45-55% of INDA delivering investment benefits, institutional investors can access more dynamic or concentrated investment vehicles onshore, i.e. within Indian bourses via domestic asset management entities. This is also true for institutional investors seeking portfolio diversification via Chinese names: Hong Kong institutions are better positioned to deliver managed investment opportunities if exposure is needed.
In international “single-name” tickers, Chinese names often suffer from an ‘alignment discount’. Because these companies are required to prioritize the State’s stability over shareholder or user predictability, they are increasingly viewed through the lens of risk rather than value. This creates an intractable competitiveness gap: while American tech competes primarily on product, Chinese tech must also defend against a massive trust barrier. In a world wary of service disruptions, a firm that must answer to the State first will always struggle to be the partner of choice when abroad. This leaves Chinese giants in a structural predicament: the state-led model that once ensured their rise has now become the very thing that keeps global competitiveness out of reach.
Update: Elements of the original commentary presented in the “momentum note” on the Leverage Shares website was also featured in the “Wealth” section of Milano Finanza on the 11th of March.
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