China ETFs In Focus As GDP Growth Slows

China’s National Bureau of Statistics said that the country’s GDP grew 6.8% year over year in the third quarter compared with 6.9% in the second quarter. However, GDP growth came in line with market expectations. Moreover, the GDP grew 1.7% sequentially in the quarter compared with 1.8% in the previous quarter. This slowdown comes just a day after president Xi Jinping started a twice-in-a-decade meeting to decide on the country’s leadership.

The bureau said that household consumption accounted for 64.5% of GDP growth in the first three quarters of 2017, while retail sales expanded 10.3% year over year in September. Moreover, factory output increased 6.6% year over year in September compared with 6% in August (read: China ETFs Rally After Week Long Holiday).

Factors Driving Markets

The Chinese government is faced with challenges of curbing property market speculation and high debt of the economy. China has reported strong growth so far this year. However, the markets are concerned that most of the growth in the world’s second largest country is debt driven.

The government’s crackdowns on financial risks led to a slowdown in economic activity in some parts of the country. Moreover, rising borrowing costs is expected to weigh on the property market.

The Communist party of China is holding its week-long 19th twice-in-a-decade congress to decide on a major leadership reshuffle. The markets are closely monitoring developments in the meeting, as Xi Jinping outlines his aims targeted at helping China become a global superpower (read: Follow These ETFs as China's 19th National Congress Begins).

Risks Involved

S&P Global ratings downgraded China’s sovereign rating by a notch to A+ from AA- and revised its outlook to stable from negative. Although the S&P forecasts the debt level to grow in the near term, it expects China’s policies on reining in debt to play out in the medium term.

Chinese officials have disregarded this downgrade stating that the strong GDP growth is reflective of strength in the economy.

China is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. Geopolitical risks have again come into the picture as the United States and South Korea hold massive joint naval drills. North Korean diplomats have said that they have the potential of firing missiles to the U.S. mainland. “As long as one does not take part in the U.S. military actions against the DPRK, we have no intention to use or threaten to use nuclear weapons against any other country,” said Kim In Ryong, North Korea’s deputy ambassador to the United Nations.

The United States imposed harsh fresh financial sanctions on North Korea, aimed at cutting down the funds that are sponsoring North Korea’s nuclear program. Since 90% of North Korea’s trade is with China, these sanctions are expected to have an impact on the latter.

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 $3.6 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 52.6%, 10.8% and 9.4% exposure, respectively (as of Oct 18, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp and Industrial and Commercial Bank of China are the top three allocations of the fund, with 9.3%, 8.8% and 7.9% exposure, respectively (as of Oct 18, 2017). The fund has returned 31.3% year to date and 21.2% in a year (as of Oct 19, 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 $2.6 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 40.1%, 22.7% and 10.2% exposure, respectively (as of Oct 18, 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 16.5%, 13.1% and 4.8% exposure, respectively (as of Oct 18, 2017). The fund has returned 48.7% year to date and 35.9% in a year (as of Oct 19, 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 $1.1 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 35.8%, 22.4% and 11.0% exposure, respectively (as of Oct 18, 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 13.6%, 11.2%, and 5.2% exposure, respectively (as of Oct 18, 2017). The fund has returned 46.3% year to date and 33.7% in a year (as of Oct 19, 2017). GXC currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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