China ETFs Rally After Week Long Holiday

Chinese markets witnessed great buying on Oct 9 after a week-long Golden Week holiday, despite a 21-month low figure for the Caixin services purchasing managers' index. The Caixin Services PMI declined to 50.6 in September compared with 52.7 in August.

Factors Driving Markets

Markets shrugged off the weakness in services PMI. Buying activity surged primarily owing to a pre-holiday announcement by the People’s Bank of China (PBOC), relating to the amount of reserves banks must hold.

Financials saw maximum gains as the move is expected to increase the amount of funds in the financial system by approximately $45.15 billion (300 billion yuan), per a fox business article. The reserve requirement will be cut in order to free up funds so that banks can lend more to small businesses.

Per a Bloomberg article, the range of cuts will vary from 0.5-1.5% depending on the relationship of the banks with small businesses.

Moreover, delegates are all set for the once in five years meeting of the Communist Party Congress on Oct 18. The markets will be closely watching this meeting as party members are expected to meet and confirm President Xi Jinping’s term as party chief.

Rating Downgrade

S&P Global ratings downgraded China’s sovereign rating by one notch to A+ from AA- and revised its outlook to stable from negative. This introduces massive uncertainty for the Chinese economy which is just days away from a leadership reshuffle. 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 (read: China Credit Rating Downgraded: ETFs in Focus).

Geopolitical Risks

China is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. Per the latest report by a Russian news agency, the RIA, a Russian lawmaker’s recent visit to Pyongyang revealed that North Koreans are prepping another long-range missile test that has the capability to reach the west coast of the United States.

United States imposed harsh fresh financial sanctions on North Korea on Sep 21. Per Reuters, People's Bank of China informed Chinese banks to adhere to UN sanctions against North Korea. Since 90% of North Korea’s trade is with China, these sanctions are expected to greatly impact the latter (read: ETFs to Lose If Trump Bans Trade With North Korean Partners).

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 52.4%, 11.0% and 9.4% exposure, respectively (as of Oct 5, 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 8.0% exposure, respectively (as of Oct 5, 2017). The fund has returned 32% year to date and 17.4% in a year (as of Oct 6, 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 39.9%, 22.6% and 10.1% exposure, respectively (as of Oct 5, 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%, 13.2% and 4.8% exposure, respectively (as of Oct 5, 2017). The fund has returned 49.4% year to date and 31.3% in a year (as of Oct 6, 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 35.6%, 22.2% and 11.0% exposure, respectively (as of Oct 5, 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%, 11.3%, and 5.2% exposure, respectively (as of Oct 5, 2017). The fund has returned 47.0% year to date and 29.6% in a year (as of Oct 6, 2017). GXC currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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