We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Time to Buy These China ETFs on Surprise Monetary Easing?
Read MoreHide Full Article
China's central bank surprised the market by announcing its second key policy rate cut in three months on Aug 17, 2023, indicating a heightened commitment to stimulate the struggling economic recovery. This move might pave the way for a reduction in the 5-year LPR, specifically aimed at supporting the property sector, which has been facing challenges, per analysts, as quoted on CNBC.
Economic Challenges Trigger Monetary Easing
July witnessed a decline in credit growth and an increase in deflation risks, prompting the need for further monetary easing measures to counter the slowdown. Market experts suggested that these factors, coupled with default risks among housing developers and payment issues from a private wealth manager, have contributed to reduced financial market confidence (read: Country Garden Crisis Puts China ETFs in the Spotlight).
Despite the central bank's earlier rate cut in June to stimulate the economy, subsequent data has indicated ongoing economic weakness, prompting the need for further measures to address the situation.
Urgent Action Required to Safeguard Confidence
Tommy Wu, a senior China economist at Commerzbank, emphasized the urgency for policymakers to take swift action to prevent a significant deterioration in consumer and business confidence, as quoted on CNBC. The combination of various challenges underscores the necessity for timely measures to stabilize the economy.
Central Bank's Move and Rationale
The People's Bank of China (PBOC) lowered the rate on 401-billion-yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans by 15 basis points to 2.50% from 2.65%. This reduction was aimed at maintaining reasonably ample liquidity in the banking system, counteracting factors such as tax payments.
The MLF rate plays a role in influencing the loan prime rate (LPR), and market participants often use the medium-term policy rate as a precursor to potential changes in the lending benchmarks. With the monthly LPR fixing scheduled for the upcoming Monday, the rate cut raises expectations for adjustments in the lending rates as well.
Contrast with Global Central Banks
China's approach to monetary policy stands in contrast to other global central banks, which have been tightening policies to combat inflation. The disparity in policy direction has led to a wider yield gap between China and other major economies, potentially exerting pressure on the yuan and increasing the risk of capital outflows.
How to Play the Move With ETFs?
The Chinese yuan has depreciated about 5% against the dollar in the current year, making it one of the weakest-performing Asian currencies. Additionally, yields on China's 10-year government bonds have eased to 2.56%, reaching the lowest level since May 2020. As bond yields are inversely related to the bond prices, investors can play China bond ETFs like KraneShares Bloomberg China Bond Inclusion Index ETF and VanEck China Bond ETF (CBON - Free Report) .
Small-cap China ETF Xtrackers Harvest CSI 500 China-A Shares Small Cap ETF (ASHS - Free Report) added 1.3% on Aug 17, higher than the largest China ETF iShares MSCI China ETF (MCHI - Free Report) (up 1%) and iShares China Large-Cap ETF (FXI - Free Report) (up 0.8%). As China is struggling with the export sector, a focus on small-caps is a better idea. Small-caps are tied to the domestic economy and consumption. Back-to-back rate cuts are likely to boost consumption of the economy.
The broad-based China ETF Investing can also be watched closely for a short-term gain. These ETFs are Global X MSCI China Health Care ETF , KraneShares MSCI All China Health Care Index ETF (KURE - Free Report) , Xtrackers MSCI China A Inclusion Equity ETF , Global X MSCI China Industrials ETF and First Trust China AlphaDEX Fund (FCA - Free Report) .
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Time to Buy These China ETFs on Surprise Monetary Easing?
China's central bank surprised the market by announcing its second key policy rate cut in three months on Aug 17, 2023, indicating a heightened commitment to stimulate the struggling economic recovery. This move might pave the way for a reduction in the 5-year LPR, specifically aimed at supporting the property sector, which has been facing challenges, per analysts, as quoted on CNBC.
Economic Challenges Trigger Monetary Easing
July witnessed a decline in credit growth and an increase in deflation risks, prompting the need for further monetary easing measures to counter the slowdown. Market experts suggested that these factors, coupled with default risks among housing developers and payment issues from a private wealth manager, have contributed to reduced financial market confidence (read: Country Garden Crisis Puts China ETFs in the Spotlight).
Despite the central bank's earlier rate cut in June to stimulate the economy, subsequent data has indicated ongoing economic weakness, prompting the need for further measures to address the situation.
Urgent Action Required to Safeguard Confidence
Tommy Wu, a senior China economist at Commerzbank, emphasized the urgency for policymakers to take swift action to prevent a significant deterioration in consumer and business confidence, as quoted on CNBC. The combination of various challenges underscores the necessity for timely measures to stabilize the economy.
Central Bank's Move and Rationale
The People's Bank of China (PBOC) lowered the rate on 401-billion-yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans by 15 basis points to 2.50% from 2.65%. This reduction was aimed at maintaining reasonably ample liquidity in the banking system, counteracting factors such as tax payments.
The MLF rate plays a role in influencing the loan prime rate (LPR), and market participants often use the medium-term policy rate as a precursor to potential changes in the lending benchmarks. With the monthly LPR fixing scheduled for the upcoming Monday, the rate cut raises expectations for adjustments in the lending rates as well.
Contrast with Global Central Banks
China's approach to monetary policy stands in contrast to other global central banks, which have been tightening policies to combat inflation. The disparity in policy direction has led to a wider yield gap between China and other major economies, potentially exerting pressure on the yuan and increasing the risk of capital outflows.
How to Play the Move With ETFs?
The Chinese yuan has depreciated about 5% against the dollar in the current year, making it one of the weakest-performing Asian currencies. Additionally, yields on China's 10-year government bonds have eased to 2.56%, reaching the lowest level since May 2020. As bond yields are inversely related to the bond prices, investors can play China bond ETFs like KraneShares Bloomberg China Bond Inclusion Index ETF and VanEck China Bond ETF (CBON - Free Report) .
Small-cap China ETF Xtrackers Harvest CSI 500 China-A Shares Small Cap ETF (ASHS - Free Report) added 1.3% on Aug 17, higher than the largest China ETF iShares MSCI China ETF (MCHI - Free Report) (up 1%) and iShares China Large-Cap ETF (FXI - Free Report) (up 0.8%). As China is struggling with the export sector, a focus on small-caps is a better idea. Small-caps are tied to the domestic economy and consumption. Back-to-back rate cuts are likely to boost consumption of the economy.
The broad-based China ETF Investing can also be watched closely for a short-term gain. These ETFs are Global X MSCI China Health Care ETF , KraneShares MSCI All China Health Care Index ETF (KURE - Free Report) , Xtrackers MSCI China A Inclusion Equity ETF , Global X MSCI China Industrials ETF and First Trust China AlphaDEX Fund (FCA - Free Report) .
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)