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China ETFs in Focus After Lower Borrowing Rates

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In an effort to address the fluctuating market sentiment following the pandemic, China's central bank implemented a reduction in the short-term lending rate on Tuesday. This marks the first rate cut in 10 months and is aimed at bolstering market confidence and revitalizing the sluggish post-pandemic recovery in the world’s second-largest economy.

According to an article on Reuters, the reduction in the lending rate serves as an indication of potential easing measures for longer-term rates in the upcoming week and beyond. This move is prompted by weakening demand and investor sentiment, further emphasizing the need for immediate policy stimulus to sustain economic growth.

Recently, the People's Bank of China (PBOC) lowered its seven-day reverse repo rate by 10 basis points, adjusting it from 2.00% to 1.90%. Additionally, the central bank injected $279.97 million (2 billion yuan) into the market through the utilization of short-term bonds.

Ahead of the highly anticipated policy meeting by the Federal Reserve this week, which holds great significance for financial markets, the PBOC may have aimed to mitigate the potential impact of any future policy easing on the Chinese yuan.

China Maintains Distinct Position as a Significant Anomaly

China stands out from other global central banks by adopting a divergent approach. As stated in Mint, while major peers are raising interest rates to combat rising consumer prices, China is loosening its monetary policy to support economic growth.

By opting for future interest rate cuts, China aims to widen the yield gap with the United States, even as the Federal Reserve maintains a rate pause this week. This strategy is expected to help keep the value of the yuan low and stimulate capital outflows.

China is set to unveil crucial data on credit lending in May, as well as key activity indicators such as retail sales and industrial production. The recent rate cut indicates policymakers' increasing worries about the country's recovery. Market expectations suggest further rate cuts by the PBOC, with potential marginal adjustments to stimulate credit growth and manage inflation concerns in the future.

A Volley of Downbeat Economic Data

According to Reuters, China's factory gate prices experienced the sharpest decline in seven years in May, surpassing expectations and reflecting the impact of weakened demand on the slowing manufacturing sector. Although China's economy demonstrated faster-than-anticipated growth in the first quarter, recent indicators indicate a rapid deterioration in demand, with declines observed in exports, imports, and factory activity during May.

While the consumer price index (CPI) recorded a slight increase of 0.2% year on year in May, it fell short of the projected 0.3% rise. Food price inflation, a key driver of CPI, decelerated to 1.0% year on year, with a month-on-month decline of 0.7%.

More Policy Changes in the Cards?

Certain investment banks are predicting a reduction of 25 basis points (bps) to the reserve requirement ratio (RRR) in China this year. However, following the recent policy interest rate cuts, there may be a diminished sense of urgency for such a move. Additionally, there are expectations for a potential decrease of the same magnitude in the lending loan prime rate (LPR) at the upcoming monthly fixing next Tuesday. The LPR holds significance in determining consumer loan and mortgage rates.

How Will the Move Benefit China?

By lowering short-term lending rates, China aims to support its economy, which has been experiencing a slowdown after the pandemic. Reducing borrowing costs make loans more attractive, which may boost consumer spending, leading to increased purchase of goods and services.

It may also stimulate borrowing and investment by making it more affordable for businesses and individuals to access credit, fostering economic activity and growth.

ETFs in Focus

This policy measure is expected to provide the necessary impetus for sustained growth in the country, providing a boost to China ETFs. Below, we highlight a few popular ETFs with exposure to China.

iShares MSCI China ETF (MCHI - Free Report)

iShares MSCI China ETF tracks the performance of the MSCI China Index. Having 647 securities in its basket, it has top allocations in Tencent (TCEHY - Free Report) with 13.04%, followed by an 8.65% allocation in Alibaba (BABA - Free Report) .

With an asset base of $7.85 billion, consumer discretionary (28.47%), communication (19.31%) and financials (16.52%) are the top three sectors. The fund charges an annual fee of 0.58%.

It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. iShares MSCI China ETF has declined 3.32% year to date and 12.60% over the past year.

SPDR S&P China ETF (GXC - Free Report)

SPDR S&P China ETF seeks to track the performance of the S&P China BMI Index. With a basket of 938 securities, the fund has the top allocation in Tencent with 10.91%, followed by a 6.85% allocation in Alibaba.

Consumer discretionary, financials and communication services occupy the top three spots, each with a share of 25.25%, 16.79% and 16.77%, respectively. SPDR S&P China ETF has an asset base of $1.21 billion and charges an annual fee of 0.59%.

It has a Zacks ETF Rank #3 with a Medium risk outlook. GXC has fallen by 12.08% over the past year and by 3.18% year to date.

iShares China Large-Cap ETF (FXI - Free Report)

iShares China Large-Cap ETF tracks the investment results of FTSE China 50 Index .The fund has a basket of 50 securities, with Alibaba and Tencent having shares of 9.01% and 8.83%, respectively.

With an asset base of $5.22 billion, consumer discretionary (34.63%), financials (28.04%) and communication (18.44%) are the top three sectors. FXI charges an annual fee of 0.74%.

It has a Zack ETF Rank #5 (Strong Sell) and a Medium risk outlook. iShares China Large-Cap ETF is down 12.71% over the past year but has risen by 2.14% in the last three months.

Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR - Free Report)

The Xtrackers Harvest CSI 300 China A-Shares ETF seeks to track the performance of the CSI 300 Index. The fund holds a basket of 289 securities with a major allocation to finance (22.68%), producer manufacturing (12.99%) and electronic technology (11.23%). ASHR has an asset base of $2.3 billion and charges an annual fee of 0.65%.

It has a Zack ETF Rank #5 and a High risk outlook. Xtrackers Harvest CSI 300 China A-Shares ETF has lost 4.18% year to date and 12.87% over the past year.

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