China Economic Data Disappoints: ETFs In Focus

China’s GDP has been growing at a strong pace. It increased 6.9% year over year in the second quarter of 2017, same as the first quarter. China reported a strong first half of 2017 but data released for July showed signs of fading GDP (read: China Q2 GDP Beats Expectations: ETFs in Focus).

The slowdown was widely expected. This can primarily be attributed to fears of a potential financial crisis owing to the looming debt problem faced by the country. The debt scenario in the world’s second largest nation prompted the government to adopt a tightening monetary-policy stance in order to rein in debt (read: China's Inflation, Debt & Impact on Australia: ETFs in Focus).

Industrial production in the world’s second largest economy grew 6.4% year over year in July compared with 7.6% in June and below economists’ expectations of 7.1%.

Retail sales on the other hand grew 10.4% year over year in July compared with 11% in June and below economists’ expectations of 10.8%.

Investment on infrastructure and property increased 8.3% year over year in the January-July period, missing forecasts of an 8.6% growth.

Although China’s debt problem demands policy tightening, the cooling down of these major indicators might restrict the government from tightening monetary policy too aggressively in order to stabilize GDP growth.

China’s inflation in July came below expectations on a year-over-year basis. The inflation data represented by the Consumer Price Index (CPI) and Producer Price Index (PPI) was released on August 9, 2017.

National Bureau of Statistics reported that the country’s Consumer Price Index increased 1.4% year over year in July 2017, a lot below the central bank’s 3% target for the year. Producer Price Index increased 5.5% year over year as a result of soaring commodity prices and resilient demand. These figures missed Bloomberg’s forecast, as analysts had predicted a 1.5% rise in CPI and a 5.6% rise in PPI.

Despite the negatives, manufacturing activity in China improved slightly in July 2017. Manufacturing Purchasing Managers’ Index (PMI) increased to 51.1 from 50.4 in June 2017. A reading above 50 indicates expansion. Therefore, despite the slowdown, China seems to be on track to achieve its 6.5% growth target for 2017.

The Chinese economy is also subject to the prevailing geopolitical risks. However, it is currently difficult to predict the impact of prevailing tensions relating to North Korea on China. Recent missile tests indicated that North Korean weapons are capable of reaching American military bases. After Kim Jong-Un singled out the American post in Guam as a potential target, President Donald Trump stated that his threats will be met with ‘fire and fury’.

The North Korean economy is heavily dependent on trade with China and it will be interesting to see how President Xi-Jinping handles the situation. This is primarily because President Donald Trump’s Chinese counterpart has so far not shown interest in using its upper hand over North Korea to tackle the situation.

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 (ST:FXI)

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

It has AUM of $3.26 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 51.91%, 11.12% and 10.64% exposure, respectively (as of August 10, 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 10.11%, 8.56% and 7.62% exposure, respectively (as of August 10, 2017). The fund has returned 18.94% year to date and 10.14% in the last one year (as of August 11, 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 $2.59 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 38.68%, 23.04% and 10.17% exposure, respectively (as of August 10, 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 16.73%, 12.09% and 4.88% exposure, respectively (as of August 10, 2017). The fund has returned 32.60% year to date and 23.68% in the last one year (as of August 11, 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 $959.59 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 33.96%, 22.24% and 11.48% exposure, respectively (as of August 10, 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 13.46%, 10.22%, and 4.66% exposure, respectively (as of August 10, 2017). The fund has returned 31.08% year to date and 22.93% in the last one year (as of August 11, 2017). GXC currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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