China Inflation Rises: ETFs In Focus

China’s Producer Price Index (PPI) rose 5.5% year over year in May 2017, compared with forecast of 5.7% and a 6.4% increase in April. This decrease in growth was mainly attributed to declining prices of raw materials.

The Consumer Price Index (CPI) on the other hand increased 1.5% year over year in May 2017, in line with market forecasts and compared with a 1.2% for April. Food prices fell 1.6% year over year compared to a decline of 3.5% in April. The second largest economy in the world has set an inflation target of 3% for 2017.

Owing to new orders, China’s services PMI touched a four-month high in May 2017. However, there was a decline in China’s manufacturing PMI, which has sparked concerns among investors (read: China's Caixin Services PMI Surges in May: ETFs in Focus).

Though the support from steel prices provided some respite to China’s profit growth recently, CRU analyst Richard Lu said to Reuters that construction activity is expected to slow down in the summers and the supply of steel might not be met with equal demand.

Moreover, China’s credit rating was downgraded to A1 from Aa3 by Moody’s owing to concerns over poor economic growth and rising debt levels (read: Moody's Cuts China's Credit Rating: ETFs in Focus).

Let us now discuss a few ETFs focused on providing exposure to the Chinese economy.

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 $3.22 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 51%, 11.82 % and 10.83% exposure, respectively (as of June 7, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp, and China Mobile Ltd are the top three allocations of the fund, with 10.69%, 8.91% and 7.55% exposure, respectively (as of June 7, 2017). The fund has returned 16.97% year to date and 24.12% in the last one year (as of June 8, 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 $2.50 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 35.49%, 24.14% and 10.67% exposure, respectively (as of June 7, 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 15.14%, 10.81% and 5.32% exposure, respectively (as of June 7, 2017). The fund has returned 27.60% year to date and 36.52% in the last one year (as of June 8, 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 $893.32 million 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 30.74%, 23.42% and 11.95% exposure, respectively (as of June 7, 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 12.24%, 8.90%, and 5.11% exposure, respectively (as of June 7, 2017). The fund has returned 26.18% year to date and 36.09% in the last one year (as of June 8, 2017). GXC currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Bottom Line

There is still high uncertainty around the future of the Chinese economy, owing to mixed results of major economic indicators. Therefore, we believe it is best to remain on the sidelines for now.

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