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Time for China Small-Cap ETFs?

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The Mainland China share market plunged as investors chose to book profit after China's stock benchmark soared 7.4% last month on the country’s economic reopening.Inverse/Leveraged FTSE China Bear -3X Direxion (YANG) gained 20.1% last week. Short FTSE China 50 -1X ETF (YXI) too was up 6.5% last week.

A likely U.S. ban on investment in Chinese tech could also play a role in dragging down China’s shares. “If there were a strict investment ban on US investors, it could create a significant supply of shares over the grace period and hence potential large volatility in the near term,” Bank of America’s Hong Kong-based research analysts said in a note Tuesday, as quoted on CNBC.

CNBC elaborated that Politico reported recently that the White House is considering an executive order to put an embargo on U.S. investment in high-end Chinese tech such as artificial intelligence, quantum computing 5G and advanced semiconductors.

However, the market is likely to rebound ahead as a private sector survey revealed that China's services activity in January grew for the first time in five months as spending and travel received a boost from the withdrawal of stringent COVID curbs and lockdowns.

The Caixin services Purchasing Managers' Index jumped to 52.9 in January from 48.0 in December. The score beat the neutral 50.0 mark for the first time since August. Meanwhile, the Caixin China General Manufacturing PMI increased to 49.2 in January 2023 from December's three-month low of 49.0.

China's retail trade declined by 1.8% year on year in December 2022, better than a 5.9% fall in the prior month and better-than-market expectations of an 8.6% drop. China's passenger car sales increased 2.4% in December as consumers thronged to take benefits of a subsidy for electric vehicles before they expired last month. Although sales are likely to weaken in January, the buying trend is hopeful.

Tourist activities surged in the Lunar New Year as the release of pent-up demand (after the prolonged lockdowns) was noticed in places like scenic spots, cinemas, restaurants and hotels. Small-Cap China ETFs are better positioned in this kind of scenario. This is especially true given small-cap stocks are more domestically-focused and their movements are less dependent on any kind of global situations or a U.S. ban.

With equity valuations appearing decent, corporate earnings on the verge of a rebound, ending of the zero-Covid policy and stimulus being showered on the struggling Chinese property market, investors may expect to earn positive returns in the days to come.

Against this backdrop, below, we highlight a few small-cap China ETFs that could see success in the near term.

Small-Cap China

iShares MSCI China Small-Cap ETF (ECNS) – Up 17% This Year

Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS) – Up 9.4% This Year

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