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Is China's Economic Rebound Genuine or a Mirage? Explore ETFs

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Outpacing expectations, China’s economy grew 5.3% compared to a year ago in the first quarter of 2024, as the country’s factories ramped up production. According to CNBC, China’s economy performed better than expected according to the 4.6% growth as estimated by a Reuters poll.

Additionally, on a quarter-on-quarter basis, China's GDP increased 1.6%, exceeding the anticipated 1.4% according to Reuters polls and marking an improvement from the revised 1.2% expansion in the previous quarter.

According to Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, as quoted on CNBC, robust external demand played a significant role in the country’s economy performing better than estimated, with export volume climbing an impressive 14% year on year. He also added that a weakening Yuan against the greenback further supports China’s exports, making it more cost effective.

China to Drive Global Growth?

As per Asian Development Bank (ADB), as quoted on CNBC, China will remain as the growth driver for the global economy even after experiencing an economic slowdown. Despite a deceleration in growth, according to ADB data, China is projected to contribute a significant 46% share of growth in developing Asia for the period of 2024-2025.

China’s economic significance is highlighted by its current share of global GDP, based on purchasing power parities exchange rates. It constitutes about 18% of global GDP and a substantial 48% of Asian GDP according to the metric.

Promising Growth Forecasts?

Driven by the robust manufacturing sector of China, Goldman Sachs revised its GDP growth upward for the country, as quoted on Reuters. The investment bank raised its projection for China's year-on-year GDP growth in 2024 to 5.0% from 4.8%.

Morgan Stanley shared similar optimism about China’s GDP growth, raising its forecast to 4.8% from the previously estimated 4.2%, according to CNBCTV18. The investment bank attributed the upward revision to better-than-expected export growth, fueled by resilient demand from the U.S. market and robust export volumes.

Per Reuters, economists at ANZ revised their 2024 growth forecast for China to 4.9% from the previous 4.2%, whereas BBVA maintained its projection at 4.8%, following growth in the first-quarter GDP reading.

Delving Into Contradictory Economic Signals

In spite of the optimistic growth forecasts for 2024, recent economic data paint a bleak picture for the world’s second-largest economy. As per CNBC, industrial output for the country saw modest growth, expanding 4.5% year on year but falling short of the anticipated 6%. Retail sales in China followed the same trend, growing 3.1% year on year, but came in below the projected 4.6%, highlighting sluggish consumer sentiment.

China’s real estate crisis persists, hindering its economic recovery efforts. According to Yahoo Finance, housing sales saw a significant fall of 33% in value in the January-February period from the previous year, marking the sharpest decline since May 2022.

New home sales, which are frequently seen as a key barometer for investment, sentiment, and price trends, continued to be incredibly slow. Authorities have attempted to boost sales by easing restrictions on home purchases, but new home sales are still relatively sluggish.

Per a Reuters article, Fitch revised its sovereign credit rating for China, downgrading it to negative, raising concerns over public finances. Borrowing confidence in the country is also noticeably lacking with new bank loans recording the slowest pace of growth on record, indicating that companies and households are not fully embracing the narrative of economic recovery just yet, according to the Yahoo Finance article.

Explore ETFs

For short-term strategies, investors may consider increasing their exposure to China ETFs to capitalize on the country’s better than expected economic performance, as economic challenges cast shadows over the long-term outlook. Analysts suggest that sustaining the momentum will be challenging without broader improvements.

Mounting geopolitical tensions contribute to heightened uncertainty, given the ongoing tensions with the United States across trade, technology and geopolitics.

Below, we highlight a few funds with exposure to the country.

KraneShares CSI China Internet ETF (KWEB - Free Report) has gained 2.42% over the past month.

iShares MSCI China ETF (MCHI - Free Report) has gained 1.56% over the past month.

iShares China Large-Cap ETF (FXI - Free Report) has gained 2.44% over the past month.

Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR - Free Report) has lost 0.61% over the past month.

SPDR S&P China ETF (GXC - Free Report) has gained 0.36% over the past month.

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