China's Caixin Services PMI Surges In May: ETFs In Focus

China’s Caixin Services Purchasing Managers Index (PMI) touched a four-month high of 52.8 in May 2017 from 51.5 in April. This is because of a surge in new orders. The new orders sub-index rose to 53.5 in May compared with April’s 53. Moreover, this is in stark contrast to the Caixin Manufacturing PMI released last week, which declined to 49.6 in May from 50.3 in April.

The Caixin services PMI was in line with the official data released by the National Bureau of Statistics on Wednesday, May 31, 2017. The non-manufacturing PMI rose to 54.5 in May compared with 54 in April.

The services sector is a major contributor to the country’s GDP and a surge in the Caixin services PMI is reflective of greater confidence. However, weakness in the manufacturing industry has sparked concerns among investors, and the final track the country will take is still uncertain.

Although GDP grew 6.9% year over year in the first quarter of 2017, the outlook for the economy remains bleak. Moreover, China’s credit rating was downgraded to A1 from Aa3 by Moodys owing to concerns over poor economic growth and rising debt levels (read: Moody's Cuts China's Credit Rating: ETFs in Focus).

Let us now discuss a few ETFs focused on providing exposure to the Chinese economy.

iShares China Large-Cap ETF (ST:FXI)

This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.

It has AUM of $3.21 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 Telecommunication Services are the top three allocations of the fund, with 51.32%, 11.76 %, and 10.99% exposure, respectively (as of June 1, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp, and China Mobile Ltd are the top three allocations of the fund, with 10.66%, 9.01%, and 7.73% exposure, respectively (as of June 1, 2017). The fund has returned 16.74% year to date and 18.48% in the last one year (as of June 2, 2017). FXI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares MSCI China ETF MCHI

This ETF is another such option to play the BRIC nation.

It has AUM of $2.44 billion and charges a fee of 64 basis points a year. From a sector look, Information Technology, Financials, and Consumer Discretionary are the top three allocations of the fund, with 35.20%, 24.35%, and 10.47% exposure, respectively (as of June 1, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba (NYSE:BABA) Group Holding ADR, and China Construction Bank Corp are the top three allocations of the fund, with 15.22%, 10.78%, and 5.42% exposure, respectively (as of June 1, 2017). The fund has returned 24.56% year to date and 27.59% in the last one year (as of June 2, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Will Alibaba's Earnings Dull the Shine of These ETFs?).

SPDR S&P China (MX:GXC) ETF GXC

This fund has AUM of $885.75 million and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials, and Consumer Discretionary are the top three allocations of the fund, with 30.62%, 23.80%, and 11.72% exposure, respectively (as of June 1, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR, and China Construction Bank Corporation are the top three allocations of the fund, with 12.30%, 8.88%, and 5.20% exposure, respectively (as of June 1, 2017). The fund has returned 23.19% year to date and 26.69% in the last one year (as of June 2, 2017). GXC currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Bottom Line

Though the improvement in the services PMI is a relief for the Chinese economy, owing to high uncertainty and financial risks that linger in the economy, we believe it is best to remain on the sidelines for now.

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