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2017 Brings Luck for China ETFs: Will the Rally Last?

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After months of tensed trading, the year of the Rooster seems to have started on a positive note with good news flowing from the Chinese territory. For long, the Chinese economy hit headlines for all wrong reasons, but the tables may now finally be turning.

First, the tumultuous 2016 ended decently for the Chinese economy on higher consumer spending and a recovery in the property market. China's GDP expanded 6.8% year over year in Q4, surpassing expectations of 6.7%. This took full-year growth to 6.7%, marking a slowdown from 6.9% growth in 2015.

Though 2016 underscored China's slowest growth clip in 26 years, it was within the range for the government to attain “its longer-term goal of doubling GDP and per capita income by 2020 from 2010 levels.” The auto sector remains pretty upbeat with sales surging at the three-year best in 2016.

Especially, two under-the-watch zones of the Chinese economy – manufacturing and export – brought a lot to the table lately. Factory output, a prolonged cause of concern for the Chinese economy, lately entered into the growth zone leaving behind the stretch of contraction. China’s official manufacturing purchasing managers index was 51.4 in December, a tad below the 51.7 reading in November but pointing to growth (read: 3 China ETFs Set to Pop on Encouraging Data).

The economy was able to reap the benefits of a weaker yuan on the export front. Exports from China jumped 7.9% year over year to $182.81 billion in January 2017, due to solid global demand, following a 6.2% decline in the prior month and breezing past expectations of a 3.3% rise. It was the fastest clip of annual growth since March 2016. Imports too grew 16.7%, beating expectations and signaling stabilization in the slowing Chinese economy.

ETF Beneficiaries

Most of the China ETFs have been on a tear this year. Global X China Materials ETF CHIM, Guggenheim China Technology ETF CQQQ, Global X China Industrials ETF CHII, KraneShares CSI China Internet ETF KWEB, Global X China Consumer ETF (CHIQ - Free Report) and PowerShares Golden Dragon China ETF PGJ have added about 23.7%, 15.1%, 14.1%, 13.8%, 12.2% and 11.8% so far this year (as of February 9, 2017) (read: How Are Material ETFs Performing Post Q4?).

Can the Rally Last?

There are still some glitches in the China’s growth story. Bank lending ballooned despite repetitive caution relating to the country's ominously high corporate debt level. Economists expect growth to whirl down further to 6.5% in 2017 as leveraged level and inflated property valuation may put a check on its growth. China’s nonfinancial corporate debt makes up about 145% of gross domestic product, as per the source.

Also, Trump’s plans to bring outsourced manufacturing jobs back to America may hurt the Chinese economy. Even economists at Goldman Sachs had predicted that a U.S.-China trade conflict is almost certain given Trump’s slew of protectionist policies. All in all, things are pretty unclear at the current level. Still, investors can bet on the above-mentioned ETFs which can basically be momentum plays (read: 5 ETF Investing Mistakes You Must Avoid).

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