China ETFs In Focus As PMI Missed Expectations

Chinese factory activity slowed in October 2017. The country’s official manufacturing purchasing managers' index (PMI) fell to 51.6 in October compared with 52.4 in September. It also came in below a Reuters forecast of 52. A reading of more than 50 indicates expansion, whereas a reading of less than 50 means contraction.

The Caixin PMI, which more closely tracks small private manufacturers, remained steady at 51 in October. Moreover, services PMI fell to 54.3 in October compared with 55.4 in September, per the National Bureau of Statistics.

What Lies Ahead?

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, GDP grew 1.7% sequentially in the quarter compared with 1.8% in the previous quarter (read: China ETFs in Focus as GDP Growth Slows).

The slowdown in factory activity can be attributed to a number of factors. A week-long public holiday in China, the Golden Week in October, affected production. Moreover, China’s production curbs to crack down on pollution have affected energy and pollution-intensive companies and have added to their cost pressures (read: China ETFs Rally After Week Long Holiday).

The Chinese government is faced with challenges of curbing property market speculation and high debt of the economy. 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.

This might lead to a slowdown in GDP growth as slower credit growth coupled with rising reforms relating to pollution problems weigh on the economy.

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. The rating action stemmed from worries over rising debt in the world’s second-largest economy.

Although the twice-in-a-decade Congress meet led to some calm in the Chinese markets, deleveraging concerns weighed on the stocks, owing to a slew of poor economic data.

China is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. North Korea has been continuously testing missiles to develop a nuclear program in order to safeguard itself from potential U.S. invasion, per North Korean leader Kim Jong-Un.

Per latest reports, an underground nuclear test in North Korea might have led to deaths of as many as 200 people after a tunnel collapsed. Chinese scientists have warned that further tests might lead the mountain where tests are held to collapse and release radioactive materials into the environment and potentially into Chinese territory.

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 52.9%, 11.1% and 9.4% exposure, respectively (as of Oct 31, 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%, 8.9% and 7.8% exposure, respectively (as of Oct 31, 2017). The fund has returned 23.2% year to date and 27.6% in a year (as of Nov 1, 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 $2.7 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 40.4%, 22.9% and 9.6% exposure, respectively (as of Oct 31, 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%, 13.7% and 4.9% exposure, respectively (as of Oct 31, 2017). The fund has returned 50.4% year to date and 39.6% in a year (as of Nov 1, 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 36.0%, 22.5% and 10.4% exposure, respectively (as of Oct 31, 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%, 11.7%, and 5.2% exposure, respectively (as of Oct 31, 2017). The fund has returned 47.9% year to date and 37.5% in a year (as of Nov 1, 2017). GXC currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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