China ETFs In Focus As GDP Beats Expectations

China’s economy grew faster than expected in the fourth quarter of 2017, official data showed. An export-led recovery helped alleviate concerns over a crackdown on pollution intensive industries and credit concerns weighing on growth in the world’s second largest economy.

Economic Scenario

China’s National Bureau of Statistics said that the country’s GDP grew 6.8% year over year in the fourth quarter, unchanged from the second quarter. Although the Chinese government has been facing challenges of curbing property market speculation and high debt, the recent economic data is welcome news for policymakers. However, the economy grew 6.9% in 2017 compared with 6.7% in the previous year, the first annual acceleration since 2010, and way above the government’s full-year target of 6.5%.

China’s consumer prices increased 1.8% year over year in December compared with 1.7% in November. However, it came in below Bloomberg’s expectations of 1.9%, per the National Bureau of Statistics (NBS). It is still way behind China’s target of 3% (read: China ETFs in Focus as Inflation Misses Expectations).

China’s industrial output increased 6.6% year over year in 2017 compared with 6% in the previous period. However, fixed asset investment and retail sales slowed, as they grew 7.2% and 10.2% year over year in 2017, respectively, compared with 6.3% and 10.0% in the previous period.

Risks Involved

In the Congress meet in late 2017, policymakers hinted at their shift of agenda toward a crackdown on pollution and financial risks from economic growth at any cost. Per a BBC article citing IMF data, China debt has reached 234% of total output, a sure red flag.

While the IMF suggests that China focus more on its financial system over growth, many analysts even argue that the country’s official data is anybody’s guess and cannot be completely trusted. Recently, governments of Inner Mongolia and city of Tianjin admitted that their 2016 economic numbers were overstated.

China, being North Korea’s biggest trade partner, is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. In his New Year’s address, North Korean premier, Kim Jong-un, warned the United States of potential nuclear action in case his country is threatened (read: What Does Kim Jong-Un's Speech Hold For Safe Haven ETFs?).

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 (TE:FXI)

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 three allocations of the fund, with 55.2%, 11.4% and 9.0% exposure, respectively (as of Jan 17, 2018). From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top three allocations of the fund, with 9.8%, 9.0% and 7.7% exposure, respectively (as of Jan 17, 2018). The fund has returned 39.6% in a year. FXI 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 $3.2 billion and charges a fee of 62 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 41.1%, 23.3% and 9.2% exposure, respectively (as of Jan 17, 2018). 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 18.8%, 12.1% and 5.0% exposure, respectively (as of Jan 17, 2018). The fund has returned 56.3% in a year. MCHI has a Zacks ETF Rank #3 with a Medium risk outlook.

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

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 three allocations of the fund, with 36.4%, 23.2% and 10.4% exposure, respectively (as of Jan 17, 2018). 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 15.7%, 10.5%, and 5.6% exposure, respectively (as of Jan 17, 2018). The fund has returned 53.1% in a year. GXC has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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