It’s been a tough year for Chinese stocks. iShares China Large-Cap ETF (TE:FXI) has gained about 0.8% in the year-to-date frame (as of May 11, 2018) compared with the 1.5% of SPDR S&P 500 ETF (NYSE:SPY) (AX:SPY) .
Trade war concerns between the United States and China as well as the Fed policy tightening have probably weighed on Chinese equities. But the underlying momentum of China investing is pretty solid. We’ll tell you why.
Ebbing Trade Tensions
The trade dispute between China and the United States seems to be nearing a resolution after two months. U.S. President Trump’s recent vows to help Chinese telecom company ZTE Corp (HK:0763) to "get back into business, fast" gave cues of easing trade tensions. Trump has indicated that the United States is “working well with China on trade matters” (read: Trade Tensions or Not, Stay Safe with These ETFs).
The appeasing tone of Trump sent China ETFs rallying on May 14. Large-cap fund FXI added about 1% while Direxion Daily FTSE China Bull 3X ETF YINN jumped 3% on the day. Direxion Daily CSI 300 China A-Shares Bull 2X ETF (PA:CHAU) advanced 2.2%.
MSCI Inclusion Coming Closer
Global investors are purchasing China stocks at the fastest clip ever as MSCI will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index starting June 2018. The move bolsters China’s standing as a major investment destination in the world.
As a result, investors bought an average 2.38 billion yuan (US$373.9 million) of mainland-traded shares on a daily basis in April, marking the highest level since the stock connect programs were launched in 2014. JPMorgan Chase (NYSE:JPM) expects the inflow to touch as much as US$40 billion, after taking investments by actively managed funds into consideration.
Announcement of $72bn Tax Cuts
China is implementing more than 460 billion yuan ($72.2 billion) in tax cuts annually. Value-added taxes were cut this month to 16% from 17% for the sale of goods, and to 10% from 11% for transportation, logistics and construction services. The government also planned in late April to widen “the qualification criteria for the preferential 3% VAT rate applied to smaller businesses and startups.” Per Zhongtai Securities, the new rates will result in more than 100-billion-yuan savings for manufacturers alone.
Reduction in Deposit Reserve Rate
China’s central bank announced in mid-April that it would lower the amount of cash that most banks are needed to keep in reserve to pour cash into the banking system. This happened for the first time since February 2016. This can be seen as relative monetary easing and came at an opportune moment when capital inflows are draining out. Such easing should boost growth momentum.
Below we highlight a few China ETFs that are on a tear.
Direxion Daily CSI China Internet Index Bull 2X Shares CWEB
The fund gives dual exposure to the performance of the CSI Overseas China Internet Index. The fund gained about 2.4% on May 14.
First Trust China AlphaDEX Fund FCA
The underlying NASDAQ AlphaDEX China Index employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ China Index. The fund gained about 1.4% on May 14.
CSOP FTSE China A50 ETF AFTY
The underlying FTSE China A50 Net Total Return Index is a free float-adjusted market capitalization-weighted index holding the 50 largest companies based on total market cap on the Shanghai and Shenzhen Exchanges, which are representative of the largest leaders within each sector. The fund was up more than 1.3% on May 14.
iShares MSCI China A ETF CNYA
The underlying MSCI China A International Index composes domestic Chinese equities that trade on the Shanghai or Shenzhen Stock Exchange. The fund gained about 1.3% on May 14.
KraneShares CSI China Internet ETF KWEB
The underlying CSI Overseas China Internet Index looks to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors. The fund added about 1.1% on May 14.
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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
DIR-D F CHIN BL (YINN): ETF Research Reports
FT-CHINA AD (FCA): ETF Research Reports
DIR-D CII BL2X (CWEB): ETF Research Reports
KRANS-C CHN INT (KWEB): ETF Research Reports
ISHRS-MS CHNA A (CNYA): ETF Research Reports
DIRX-D CSI 300 (CHAU): ETF Research Reports
CSOP FTSE CHINA (AFTY): ETF Research Reports
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