Don't Fear China's Weaker Growth, Play It With These ETFs

China’s economy is slowing — it recorded 6.6% growth in 2018, markingthe lowest growth rate since 1990. Also, the country recently cut its economic growth forecast for 2019 in the range of 6-6.5%, down from a target of 6.5% over the past two years.

A heightened trade dispute with the United States, falling domestic demand and frightening off-balance-sheet borrowings by local governments resulted in the slowdown. Also, the government’s clampdown on financial risks, which increased corporate borrowing costs and hurt investment, pushed to the economy toward a slowdown. Government’s initiatives to limit polluting and low-value industries also decelerated China's huge manufacturing sector, per Reuters.

The year 2018 went all wrong for China investing due to trade tensions with the United States. It started in March after Trump ordered duties on steel and aluminum imports followed by an announcement to levy up to $60 billion of import duties on Chinese goods.So far, the United States has imposed tariffs on $250 billion worth of imports from China, while Beijing has retaliated with tariffs on $110 billion worth of U.S. goods, per the source(read: One Year of Trade Spat: 5 ETF Winners).

Is 2019 Going to Be Bullish for China Investing?

While cutting the growth forecast, the Chinese government left no stone unturned to shore up the economy. It announced a cut in the value-added tax (VAT) for the manufacturing sector to 13% from 16%, and VAT for the transport and construction sectors to 9% from 10%. The government will also cut the social security fees paid by companies to 16%.

All these tax cuts are worth about 2 trillion yuan ($298 billion) for the year. China, last year, slashed taxes and fees worth 1.3 trillion yuan and allowed local governments to issue 1.35 trillion yuan in special bonds to fund key projects.

Also, things are improving on the trade front this year.Late last month, Trump even postponed the increase in tariffs on $200 billion in Chinese goods to 25% from 10% from this month, citing "substantial progress" in trade talks. There are chances that Trump and China’s president Xi Jinping could strike an official trade deal at a summit around Mar 27, per the Wall Street Journal report released on Sunday (read: 10 ETF Areas to Gain as Trump Delays Additional Tariffs).

In the past one year, China cut commercial lenders’ reserve requirement ratio (RRR) five times to make borrowing easier for small and private firms with the latest 100 bps cut being enacted in January.

There was bullishness on the equity front as well. MSCI is on its way to quadruple the weighting of Chinese A-shares from the current 5% to 20% for a number of its indexes, most notably the MSCI Emerging Markets Index in three phases - 10% in May, 15% in August, and further to 20%in November. Upon completion of the inclusion, MSCI estimates that China A shares will make up 3.3% of the MSCI Emerging Markets Index, 4% of the MSCI AC (All Country) ex Japan Index and 10.4% of the MSCI China Index. As many as 253 large-cap and 168 mid-cap China A shares, including 27 ChiNext shares will be there on the MSCI Emerging Markets and MSCI China indexes.

ETFs in Focus

Against this backdrop, we would like to highlight a few China ETFs that have been the steadiest in the past week and should continue the winning momentum in the coming days.

VanEck Vectors ChinaAMC SME-ChiNext ETF CNXT – Up 5.1%

KraneShares MSCI All China Health Care Index ETF KURE – Up 5.0%

Xtrackers Harvest CSI 500 China-A Shares Small Cap Fund ASHS – Up 3.8%

Xtrackers CSI 300 China A-Shares Hedged Equity ETF ASHX – Up 3.4%

Reality Shares Nasdaq NexGen Economy China ETF BCNA – Up 2.9%

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