China Had A Strong Start In 2018: ETFs To Buy

The world’s second largest economy started 2018 on a solid note, as latest data released by the National Bureau of Statistics (NBS) show better-than-predicted economic fundamentals.

China’s economy grew 6.9% in 2017 compared with 6.7% in the previous year, marking the first annual acceleration since 2010. It was also way above the government’s full-year target of 6.5%. The impressive growth came despite the fact that the emerging market nation faces risks like the crackdown on pollution, increasing financial threats and concerns surrounding possibilities of a trade war with Trump-led United States.

Into the Headlines

Industrial output grew 7.2% year over year in the first two months of 2018 compared with 6.2% last December and above 6.1% projected by analysts. Moreover, China’s fixed asset investment rose 7.9% in the first two months of the year compared with analyst expectations of 7% and above 7.2% for the entire 2017.

Although China’s retail sales slowed a little in the January-February period from 2017, it was still robust. It grew 9.7% year over year in the first two months of 2018 compared with 10.2% in 2017. However, it should be noted that economic data from China in the first two months of a year are considered to be distorted, caused by a week long holiday for Lunar New Year celebrations that fell in mid-February this year. As a result, a better analysis of China’s economic health can be conducted when the first quarter’s data gets released in April.

Risks Involved

Although geopolitical risks involving North Korea are not bothering the markets at the moment, as North Korea’s Kim Jong-Un has offered to hold potential denuclearization talks with Trump, a slew of other factors are troubling China’s market (read: An End to North Korea Fears? ETFs to Watch).

From a political risk perspective, the Chinese Communist Party amended its constitution to remove presidential term limits and allow a third term for President Xi Jinping. Being number two in the world, Xi’s policies are expected to greatly impact global peace and shape up policies, as he aims to take China closer to being the number one country, marring relations with peers in Washington.

Moreover, tensions between Washington and Beijing have been on the rise. After introducing a tariff on steel and aluminum, Trump has proposed the imposition of tariffs on around $60 billion worth of Chinese imports of IT, telecom and consumer products. China recorded a $375-billion trade surplus with the United States in 2017 and the Trump administration is pressing Chinese representatives to cut that humongous amount by $100 billion (read: Trump Tariffs: ETF Winners & Losers).

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 $4.7 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 allocations of the fund, with 52.4%, 11.1% and 10.0% exposure, respectively. From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top allocations of the fund, with 10.4%, 9.5% and 8.1% exposure, respectively. The fund has returned 30.8% in a year. FXI has a Zacks ETF Rank #2 (Buy) 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 $3.6 billion and charges a fee of 62 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 42.0%, 23.3% and 9.3% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba (NYSE:BABA) Group Holding ADR and China Construction Bank Corp are the top allocations of the fund, with 19.2%, 12.4% and 5.3% exposure, respectively. The fund has returned 48.5% in a year. MCHI has a Zacks ETF Rank #2 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 allocations of the fund, with 37.2%, 23.2% and 10.4% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top allocations of the fund, with 16.1%, 10.8%, and 5.9% exposure, respectively. The fund has returned 45.4% in a year. GXC has a Zacks ETF Rank #2 with a Medium risk outlook.

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