IMF Raises China Growth Outlook: ETFs In Focus

The International Monetary Fund (IMF) has raised China’s GDP growth outlook to 6.7% for 2017 compared with its previous forecast of 6.6%. They also believe that the GDP growth for the second largest economy of the world will average around 6.4% during 2018-2020. This revision comes after IMF members toured Beijing and Lanzhou in China in the first two weeks of June to complete the Article IV review of the economy.

The review was led by James Daniel, Assistant Director of the Asia and Pacific Department, and included discussions with key representatives of the government and private sector on issues ranging from economic prospects to reform progress and policy implementation.

The IMF stated that further reforms will be required to reduce the economy’s dependence on debt. Moreover, a hawkish outlook by the U.S. Federal Reserve might lead to a rally in the greenback and increase the debt burden of Asian economies, per the Deputy Managing Director of IMF, Mitsuhiro Furusawa.

China also released its economic data this week. The growth in Industrial production for May came in at 6.5% and retail sales grew at 10.7%, flat month on month. However, fixed asset investment decreased to 8.6% in the first five months of 2017 compared with 8.9% in the first four months (read: China Inflation Rises: ETFs in Focus).

China also suffered a rating downgrade by Moody’s last month on economic growth and debt burden woes. It was reduced to A1 from Aa3 whereas the outlook was changed to stable from negative. This is in direct contrast to the recently released IMF outlook (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 $3.19 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 three allocations of the fund, with 50.77%, 11.71 % and 10.76% exposure, respectively (as of June 13, 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 10.76%, 8.89% and 7.50% exposure, respectively (as of June 13, 2017). The fund has returned 15.04% year to date and 24.52% in the last one year (as of June 14, 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 $2.45 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 36.23%, 23.92% and 10.48% exposure, respectively (as of June 13, 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 15.16%, 11.79% and 5.27% exposure, respectively (as of June 13, 2017). The fund has returned 24.38% year to date and 34.59% in the last one year (as of June 14, 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 $890.09 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 31.41%, 23.26% and 11.81% exposure, respectively (as of June 13, 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 12.27%, 9.72%, and 5.07% exposure, respectively (as of June 13, 2017). The fund has returned 23.11% year to date and 34.06% in the last one year (as of June 14, 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 and contrasting outlook of global organizations. Moreover, there is a high degree of political and economic uncertainty in the U.S. as well, so it is difficult to judge its impact on emerging economies of Asia as of now. Therefore, we believe it is best to remain on the sidelines for now.

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