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How are China ETFs Outperforming the Market in 2017?

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After a roller-caster ride in 2016, the year of the Rooster – 2017 – seems to have brought good luck for China investing. The country’s stocks have buoyed up on good news flowing from the economy.

First, the tumultuous 2016 ended decently for the Chinese economy on higher consumer spending. China's GDP expanded 6.8% year over year in Q4, surpassing expectations of 6.7%. It was the highest clip of expansion since the fourth quarter of 2015. However, this took full-year growth to 6.7%, marking a slowdown from 6.9% growth in 2015 and the weakest rate in 26 years.

Is It Really a Slowdown or a Reflection of a Shift in Economic Base?

Investors should note that the Chinese economy has been in the process of a shift in economic base. Reforms – whether financial or demographic – are rampant in China. In late 2015, Beijing put an end to the country’s decades-long infamous one-child policy (read: China Ends One Child Policy: Stocks & ETFs to Watch).

More Focus on Domestic Consumption

This is because China has long been working on stepping up domestic consumption, shifting its focus from exports and intending to move to a ‘slower and more balanced growth’ economy. This way it would be possible for China to override global growth concerns that frequently grip the broader market these days.

Focus on Service-Oriented Sector

China also launched a new indicator for the services sector to efficiently gauge the vast range of activity from movies to restaurants that now make up over half of the economy. This points at the country’s tendency to shift to a service-oriented economy from a manufacturing-driven one.

As per Bloomberg, services made up about 51.6% of economic output in 2016. The segment’s 8.3% growth in Q4 helped to counterbalance slower growth in manufacturing and agriculture. The move came in the wake of prolonged stress in the Chinese manufacturing sector which suffered the wrath of weaker global demand.

Though factory output lately entered into the growth zone leaving behind a patch of contraction, it probably set the alarm bells ringing for Chinese administrators. In fact, policy easing couldn’t contain the slide in Chinese manufacturing activities then.

Struggling Manufacturing Sector Got Another Life

Nevertheless, this under-the-watch zone also picked up momentum lately having expanded for seven successive months. The country's manufacturing purchasing managers' index (PMI) came in at 51.6 in February, 0.3 points higher than January. This gives cues of stabilization in the economy (read: 2017 Brings Luck for China ETFs: Will the Rally Last?).

Hike in Borrowing Costs = Policymakers Faith on Economy

In mid-March, China’s central bank hiked borrowing costs, again hinting at a stable economy. Stabilization in the economy, rise in inflation, decline in real lending costs and a boom in the housing market prompted the central bank to tightening the policy. This in turn would benefit the country’s financial sector.

Bullish Sentiments

China’s bankers and corporate leaders appear as confident as they were in 2014, as per a central bank survey. An indicator of bankers’ confidence in the economy grew to 64.9 in the first three months of this year to touch the three-year best level. Confidence among entrepreneurs also jumped to 61.5, reflecting a two-and-a-half year high.

Winning ETFs

Below we highlight a few China ETFs that have outperformed the U.S. as well as emerging market equities ETFs so far this year. Notably, the broader emerging market ETF EEM has advanced 12.9% and the S&P 500-based ETF SPY has added 4.6% in the year-to-date frame (as of March 21, 2017) (see all Asia-Pacific (Emerging) ETFs here).

Global X China Materials ETF CHIM – Up 26.3%

Global X China Industrials ETF CHII – Up 22.5%

First Trust China AlphaDEX Fund FCA – Up 19.8%

KraneShares CSI China Internet ETF (KWEB - Free Report) – Up 19.5%

Global X China Consumer ETF CHIQ – Up 18.5%

Guggenheim China Technology ETF CQQQ – Up 17.4%

Global X China Financials ETF CHIX – Up 14.8%

Can the Rally Last?

There are still some glitches in China’s growth story. Bank lending ballooned despite the country's ominously high corporate debt level. Economists expect growth to fall further to 6.5% in 2017 as leveraged level and inflated property valuation may put a check on its growth.

All in all, things are stable if not stellar. Investors can bet on the above-mentioned ETFs that are basically momentum plays.

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