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The world’s second largest economy started 2018 on a solid note, with strong industrial output and fixed asset investment growth. In fact, China’s economy grew 6.9% in 2017 compared with 6.7% in the previous year, marking the first annual acceleration since 2010.
However, the emerging market nation faces risks like a crackdown on pollution, increasing financial threats and possibilities of a trade war with Trump-led United States.
Into the Headlines
The official purchasing managers’ index (PMI) increased to 51.5 in March compared with 50.3 in the previous month. A reading above 50 indicates expansion. However, the Caixin PMI for smaller firms decreased to a four-month low of 51.0 compared with 51.6 in the prior month.
Although the Chinese economy has exhibited strong positive trends since the start of 2018, recent data shows a build-up of increased worries with muted demand weighing on GDP growth. "Demand was not as strong as expected, leading to lower willingness of manufacturers to produce and restock," per a Market Watcharticle citing a statement by Zhengsheng Zhong, an economist at CEBM Group.
Risks Involved
Although geopolitical risks involving North Korea are not bothering the markets at the moment, as North Korea’s Kim Jong-Un has offered to hold potential denuclearization talks with Trump, a slew of other factors are troubling China’s market (read: An End to North Korea Fears? ETFs to Watch).
From a domestic perspective, the Chinese government is aiming to crack down on high debt levels and pollution intensive industries, to transform the manufacturing oriented economy to a more balanced economy.
Moving on to trade, tensions between Washington and Beijing have propped up. Trump has imposed tariffs on around $60 billion worth of Chinese imports of IT, telecom and consumer products, in response to China’s violation of intellectual property rights. In a latest show of retaliatory force, China’s ministry of commerce said it would be imposing tariffs of up to 25% on 120 U.S. food products worth $3 billion.
However, given the relative light retaliatory tariffs, economists are arguing that China might be open to ease the intensity of the trade tensions. “The amount subject to tariff is not big, which shows China is willing to ease the intensity of the trade conflict that was started by the US. Trump gave us a heavy shot, and China is giving a light shot back,” per a Guardian article citing Shi Yinhong, director of the US research center at Renmin University.
This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.
It has AUM of $4.4 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy and Information Technology are the top allocations of the fund, with 49.1%, 11.6% and 11.3% exposure, respectively. From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top allocations of the fund, with 9.1%, 8.8% and 8.5% exposure, respectively. The fund has returned 23.8% in a year. FXI has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
This ETF is another such option to play the BRIC nation.
It has AUM of $3.4 billion and charges a fee of 62 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 40.8%, 23.0% and 9.1% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corp are the top allocations of the fund, with 18.0%, 12.8% and 5.2% exposure, respectively. The fund has returned 37.9% in a year. MCHI has a Zacks ETF Rank #2 with a Medium risk outlook.
This fund has AUM of $1.2 billion and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 36.1%, 22.9% and 10.2% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top allocations of the fund, with 15.1%, 11.1%, and 5.8% exposure, respectively. The fund has returned 35.9% in a year. GXC has a Zacks ETF Rank #2 with a Medium risk outlook.
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What Lies Ahead for China ETFs?
The world’s second largest economy started 2018 on a solid note, with strong industrial output and fixed asset investment growth. In fact, China’s economy grew 6.9% in 2017 compared with 6.7% in the previous year, marking the first annual acceleration since 2010.
However, the emerging market nation faces risks like a crackdown on pollution, increasing financial threats and possibilities of a trade war with Trump-led United States.
Into the Headlines
The official purchasing managers’ index (PMI) increased to 51.5 in March compared with 50.3 in the previous month. A reading above 50 indicates expansion. However, the Caixin PMI for smaller firms decreased to a four-month low of 51.0 compared with 51.6 in the prior month.
Although the Chinese economy has exhibited strong positive trends since the start of 2018, recent data shows a build-up of increased worries with muted demand weighing on GDP growth. "Demand was not as strong as expected, leading to lower willingness of manufacturers to produce and restock," per a Market Watch article citing a statement by Zhengsheng Zhong, an economist at CEBM Group.
Risks Involved
Although geopolitical risks involving North Korea are not bothering the markets at the moment, as North Korea’s Kim Jong-Un has offered to hold potential denuclearization talks with Trump, a slew of other factors are troubling China’s market (read: An End to North Korea Fears? ETFs to Watch).
From a domestic perspective, the Chinese government is aiming to crack down on high debt levels and pollution intensive industries, to transform the manufacturing oriented economy to a more balanced economy.
Moving on to trade, tensions between Washington and Beijing have propped up. Trump has imposed tariffs on around $60 billion worth of Chinese imports of IT, telecom and consumer products, in response to China’s violation of intellectual property rights. In a latest show of retaliatory force, China’s ministry of commerce said it would be imposing tariffs of up to 25% on 120 U.S. food products worth $3 billion.
However, given the relative light retaliatory tariffs, economists are arguing that China might be open to ease the intensity of the trade tensions. “The amount subject to tariff is not big, which shows China is willing to ease the intensity of the trade conflict that was started by the US. Trump gave us a heavy shot, and China is giving a light shot back,” per a Guardian article citing Shi Yinhong, director of the US research center at Renmin University.
Let us now discuss a few ETFs focused on providing exposure to the Chinese economy (see all Asia-Pacific Emerging ETFs here).
iShares China Large-Cap ETF (FXI - Free Report)
This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.
It has AUM of $4.4 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy and Information Technology are the top allocations of the fund, with 49.1%, 11.6% and 11.3% exposure, respectively. From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top allocations of the fund, with 9.1%, 8.8% and 8.5% exposure, respectively. The fund has returned 23.8% in a year. FXI has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares MSCI China ETF (MCHI - Free Report)
This ETF is another such option to play the BRIC nation.
It has AUM of $3.4 billion and charges a fee of 62 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 40.8%, 23.0% and 9.1% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corp are the top allocations of the fund, with 18.0%, 12.8% and 5.2% exposure, respectively. The fund has returned 37.9% in a year. MCHI has a Zacks ETF Rank #2 with a Medium risk outlook.
SPDR S&P China ETF (GXC - Free Report)
This fund has AUM of $1.2 billion and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 36.1%, 22.9% and 10.2% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top allocations of the fund, with 15.1%, 11.1%, and 5.8% exposure, respectively. The fund has returned 35.9% in a year. GXC has a Zacks ETF Rank #2 with a Medium risk outlook.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>