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Will China ETFs Suffer on Slowing Factory Activity Growth?

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The world’s second-largest economy witnessed a slower pace in factory activity growth in August. Surging raw material prices and COVID-related constraints are likely to have impacted manufacturers, building pressure on them. According to the National Bureau of Statistics (NBS), China’s official manufacturing Purchasing Manager’s Index (PMI) came in at 50.1 for August in comparison with 50.4 in July. The metric also lagged analysts’ forecast of 50.2, per a Reuters article. Notably, any reading above 50 signals expansion.

Going on, China’s official non-manufacturing PMI for August stood at 47.5, the lowest level since early 2020. Commenting on the data, Jonathan Pain, author of The Pain Report, said that “I think these numbers confirm what a lot of other data has been suggesting for a while now that the Chinese economy is slowing down. China was the first into this pandemic and the first out of it as such and I think now we’re beginning to see a much more broadening kind of slowing in the overall economy,” as mentioned in a CNBC article.

There is no doubt that China showed fast recovery from the pandemic-led economic slowdown. However, it appears like slowing export levels, strict initiatives to control hot property prices, the coronavirus outbreak and efforts to reduce carbon emissions might have triggered a slowdown in the momentum of economic recovery.

Moreover, China’s economy grew 7.9% year over year in the second quarter of 2021, slowing sharply from a record 18.3% expansion in first-quarter 2021 and falling short of the market consensus of 8.1%. A slowdown in factory activity, higher raw material costs and COVID-19 outbreaks stalled the recovery momentum. Meanwhile, China has set an economic growth target of above 6% for 2021.

Nomura economists have also noted that "The worse-than-expected August PMIs add conviction to our view that the growth slowdown in H2 could be quite notable. We expect Beijing to maintain its policy combination of 'targeted tightening' for a few sectors, especially the property sector and high-polluting industries, complemented by 'universal easing' for the rest of the economy," according to a Reuters article.

Another important economic data released earlier was also disappointing. China’s retail sales rose 8.5% year over year in July, lagging the forecast of 11.5% growth (per a Reuters article). Industrial production growth of 6.4% in July also missed the expectation of a 7.8% year-on-year increase, according to a Reuters article.

China ETFs That Might Suffer

Against this backdrop, investors can keep a tab on a few China ETFs like iShares MSCI China ETF (MCHI - Free Report) , iShares China Large-Cap ETF (FXI - Free Report) , Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR - Free Report) , SPDR S&P China ETF (GXC - Free Report) , iShares MSCI China A ETF (CNYA - Free Report) and Invesco Golden Dragon China ETF (PGJ - Free Report) .

MCHI

This fund tracks the MSCI China Index. It comprises 603 holdings. The fund’s AUM is $5.99 billion and expense ratio is 0.59% (read: Alibaba Misses Revenue Estimates: ETFs in Focus).

FXI

This fund seeks long-term growth by tracking the investment returns, before fees and expenses, of the FTSE China 50 Index. It comprises 50 holdings. The fund’s AUM is $4.76 billion and expense ratio is 0.74%.

ASHR

This fund tracks the CSI 300 Index. It comprises 304 holdings. The fund’s AUM is $2.09 billion and expense ratio is 0.65%.

GXC

The fund seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P China BMI Index. It comprises 834 holdings. The fund’s AUM is $1.75 billion and expense ratio is 0.59% (read: Is This the Time to Buy China ETFs on Bargain?).

CNYA

The fund tracks the MSCI China A Inclusion Index. It comprises 472 holdings. The fund’s AUM is $652.8 million and expense ratio is 0.60%.

PGJ

This fund follows the NASDAQ Golden Dragon China Index, which offers exposure to the U.S. exchange-listed companies headquartered or incorporated in the People’s Republic of China. It holds a basket of 99 stocks. The product has AUM of $222.8 million and charges 70 basis points in annual fees.