China's Inflation, Debt & Impact On Australia: ETFs In Focus

China’s inflation in June came in line with expectations on a year-over-year basis. The inflation data represented by the Consumer Price Index (CPI) and Producer Price Index (PPI) was released earlier on July 10, 2017.

National Bureau of Statistics reported that the country’s Consumer Price Index increased 1.5% year over year in June 2017, while Producer Price Index increased 5.5% year over year. These figures were in line with Reuters forecasts. However, both these measures declined 0.2% on a monthly basis (read: China PMI Surges: ETFs in Focus).

Analysts are predicting that growth in the PPI will bolster economic growth in the world’s second largest economy. Although PPI has increased at an encouraging pace, growth in the sub-index has slowed compared with the eight-year high of 7.8% it hit in February this year. This can primarily be attributed to fears of a potential financial crisis owing to the looming debt problem faced by the country.

The issue is that there is so much debt that it will be difficult for China to handle growth targets while maintaining risks at a certain level. Moreover, per CNN, China’s corporate debt reached 170% of GDP in 2016, almost double the average of other economies’ load. This prompted Moody’s to downgrade China’s rating by a notch to A1 from Aa3 earlier this year in May (read: Moody's Cuts China's Credit Rating: ETFs in Focus).

What’s worrying is that if China goes down, on the list of economies that will be impacted, Australia will top. Australia survived the global financial crisis owing to a stimulus program from China. Moreover, China is the largest market for Australian mineral exports. The Chinese also comprise a huge part of the population availing Australian services like education and tourism. Therefore, a large number of Australian jobs are dependent on the health of the Chinese economy.

The risk that the Australian economy faces is that China, in order to tackle the debt crisis, will need to take steps that might reduce the optimistic growth target of the country. This in turn will reduce imports from Australia and other countries and also overseas education and tourism, services integral to the performance of the Australian economy. Some ETFs focused on providing exposure to Australia are iShares MSCI Australia ETF EWA, SPDR MSCI Australia Quality Mix ETF QAUS and WisdomTree Australia Dividend Fund AUSE (read: Moody's Downgrades Australian Banks: 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 $3.14 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 51.01%, 11.42 % and 10.45% exposure, respectively (as of July 7, 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 8.81%, 8.34% and 7.50% exposure, respectively (as of July 7, 2017). The fund has returned 13.94% year to date and 12.55% in the last one year (as of July 10, 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 $2.45 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 36.68%, 23.25% and 10.48% exposure, respectively (as of July 7, 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 14.97%, 12.31% and 4.88% exposure, respectively (as of July 7, 2017). The fund has returned 24.97% year to date and 25.46% in the last one year (as of July 10, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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

This fund has AUM of $890.21 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 32.09%, 22.67% and 11.90% exposure, respectively (as of July 7, 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 12.17%, 10.36%, and 4.71% exposure, respectively (as of July 7, 2017). The fund has returned 24.33% year to date and 24.95% in the last one year (as of July 10, 2017). GXC currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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