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Will China ETFs Rebound in Year of Dragon?

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The Year of the Rabbit, which began on January 22, 2023, was a rough period for Chinese stocks due to an economic dip and property market crisis. iShares China Large-Cap ETF (FXI - Free Report) lost 21.5% in the past one year. However, as we ushered in the Chinese New Year – Year of Dragon (which started from Feb 10, 2024) – investors around the globe are closely watching China, the world's second-largest economy, for signs of what this lunar year might hold for financial markets.

The starting of this new lunar year has been hopeful with FXI gaining 2.4% past week. Chinese shares defied broader weakness in Asia, buoyed by policymakers' efforts to boost investor confidence. Hong Kong-listed Chinese firms saw a notable jump lately, while mainland shares also rose, driven by increased funding support for property developers and a crackdown on trading by quant funds, per Bloomberg.

Inside Monetary Policy Easing

In January, China said that Starting Feb. 5, the People’s Bank of China will allow banks to hold smaller cash reserves, as quoted on CNBC. Cutting the reserve requirement ratio (RRR) by 50 basis points will likely to release 1 trillion yuan ($139.8 billion) in long-term capital. However, Beijing has been hesitant to embark on massive stimulus, which would also widen the yield gap between China and the United States (given a hawkish Fed).

What Went Wrong in 2023?

While the real estate sector crisis in China hit the headlines, those issues are among multiple elements dampening the mood of investors. The huge real estate sector has been a drag on economic growth, and combined with a decline in exports and subdued consumer spending, has hindered the economy's recovery from the pandemic.

The Chinese economy grew by 5.2% in 2023, marking a slowdown from double-digit growth in decades past. Tensions between the United States and China, centered on tech competition, have also weighed on sentiment.

Fiscal Support Expected in 2024?

China is scheduled to conduct its yearly parliamentary session in March, during which it may announce a broader fiscal deficit and additional policies for the upcoming year. China may set economic growth target of 5% in the year ahead, per CNBC.

ETF Areas in Focus

Against this backdrop, investors can play safe with China ETF investing. Below we highlight a few ETF areas that could gain from the new year euphoria as well as policy support.

Retail and Consumer Goods: Historically, the Chinese New Year is a peak time for consumer spending. Investors should keep an eye on companies in the consumer discretionary sector, as these typically see a surge in sales during the festival period. Global X MSCI China Consumer Discretionary ETF (CHIQ - Free Report) is up 5.2% past week while KraneShares CICC China Consumer Leaders Index ETF gained 3.6%.

Technology and Internet: The festival season accelerates the adoption and use of digital services, from online shopping to mobile payments. Plus, festival or not, global tech rally is here to stay. Direxion Daily CSI China Internet Index Bull 2x Shares (CWEB - Free Report) has gained 8.5% past week.

Broader Chinese Market: Matthews China Active ETF (MCH - Free Report) (up 6.1% past month, up 2.7% past week), iShares MSCI China ETF (MCHI - Free Report) (up 6.6% past month, up 1.7% past week) and FXI (up 8.4% past month, up 2.2% past week) are best bets if the economy shows signs of recovery with the help of policy support.

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