What Led China ETFs Outperform In Q1 & Have More Room To Run

Many have been worrying about the Chinese economic slowdown of late, but Chinese stocks, especially A-Shares, have been on a tear this year on a host of reasons. In early March,the country 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.

But that failed to hold back the China market rally as Xtrackers Harvest CSI 500 China-A Shares Small Cap ETF ASHS (up 11.9%) breezed past the S&P 500 (up 2.9%) in the past month. Chinese stocks just hit a 2019 high and one technician says this is just the beginning of the Chinese stock rally (read: Top ETF Stories of Q1).

Let’s delve a little deeper.

Progress in Trade Talks

Signs of a resolution to the year-long U.S.-China trade spat is basically acting as the main tailwind. In late February, President Donald Trump postponed the increase of tariffs on about $200 billion worth of Chinese goods, citing “substantial progress” in trade talks with Beijing. The increment was earlier scheduled to take place from Mar 1 (read: 10 ETF Areas to Gain as Trump Delays Additional Tariffs).

Most recently, the Financial Times reported that top U.S. and Chinese officials have resolved most of the issues pertaining to trade conflicts but are still negotiating on how to enact the agreement, as quoted on Reuters. U.S. President Donald Trump's also commented that trade talks with China were going very well.

Reformative Measures

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 for the year.

In the past 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. China's government also vowed for broader and more rapid liberalization of the country's financial markets, following which foreign buyers flocked to the market.

Uptick in Manufacturing Sector

China’s all-important and long-ailing manufacturing sector is showing signs of improvement. The Caixin China General Manufacturing PMI rose to 50.8 in March 2019 from 49.9 in the prior month, beating market expectations of 50.1. The latest data marked the first increase in manufacturing activity in four months and came in the strongest since July 2018. There was a rebound in new export orders and employment rose for the first time since October 2013.

MSCI Inclusion

MSCI is allowing investors a greater access to the world’s second-largest stock market: China. MSCI is quadrupling the weighting of domestically traded Chinese stocks in its global indexes from 5% to 20% starting this May. Exposure will be raised in three phases — 10% in May, 15% in August, and further to 20% in November (read: China A-Shares ETFs to Roar Higher on MSCI Move).

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.

ETF winners

Against this backdrop, we would like to highlight a few China ETFs that have been the steadiest this year and may see the winning momentum in the coming days as well.

VanEck Vectors ChinaAMC SME-ChiNext ETF CNXT – Up 45.2%

Xtrackers Harvest CSI 500 China-A Shares Small Cap Fund – Up 42.5%

Reality Shares Nasdaq NexGen Economy China ETF BCNA – Up 41.7%

SPDR MSCI China A Shares IMI (LON:IMI) ETF XINA – Up 38.6%

Xtrackers Harvest CSI 300 China A-Shares Fund ASHR – Up 36.8%

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