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Chinese stocks traded lower as Moody’s Investors Service cut the country’s credit rating from Aa3 to A1. However, it also changed the outlook to stable from negative.
The rating agency supported its argument by saying that China’s financial strength is expected to worsen due to poor economic growth and increasing debt levels. China’s total outstanding debt escalated to about 260% of GDP in 2016, reflecting an increase from 160% in the wake of the global financial crisis of 2008, per Bloomberg.
Though majority of China’s sovereign debt is held by domestic investors, this rating downgrade was not well received by the people. Although it is still in the investment grade range, it is particularly expected to increase the cost of borrowing for the government. Moreover, it comes at a time when bond yields are reaching new highs as China targets regulations to answer the financial risks it faces.
The Shanghai Composite Index opened almost 0.50% lower at market open on May 24, 2017, as investors deal with the downgrade and doubt if the government will be able to address the debt problems while maintaining its growth target.
Amongst others impacted by this surprise downgrade was the Australian dollar, often seen as a proxy hedge for China. China is one of the biggest trading partners of Australia. In 2015-2016, Australia’s total merchandise trade with China amounted to A$ 136.668 billion, as per Australian Government’s Department of Foreign Affairs & Trade. Therefore, it does not come as a shock that a downgrade of China adversely impacted the Australian dollar.
This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.
It has AUM of $3.14 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy, and Information Technology are the top three allocations of the fund, with 50.66%, 12.11%, and 11.05% exposure, respectively (as of May 22, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp, and China Mobile Ltd are the top three allocations of the fund, with 11.05%, 8.91%, and 7.84% exposure, respectively (as of May 22, 2017). The fund has returned 14.03% year to date and 20.78% in the last one year (as of May 23, 2017). FXI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
This ETF is another such option to play the BRIC nation.
It has AUM of $2.40 billion and charges a fee of 64 basis points a year. From a sector look, Information Technology, Financials, and Consumer Discretionary are the top three allocations of the fund, with 36.07%, 24.09%, and 10.35% exposure, respectively (as of May 22, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR, and China Mobile Ltd are the top three allocations of the fund, with 15.79%, 11.01%, and 5.38% exposure, respectively (as of May 22, 2017). The fund has returned 22.36% year to date and 30.19% in the last one year (as of May 23, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Will Alibaba's Earnings Dull the Shine of These ETFs?).
This fund has AUM of $873.37 million and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials, and Consumer Discretionary are the top three allocations of the fund, with 31.36%, 23.36%, and 11.66% exposure, respectively (as of May 22, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR, and China Construction Bank Corporation are the top three allocations of the fund, with 12.63%, 9.02%, and 5.10% exposure, respectively (as of May 22, 2017). The fund has returned 20.76% year to date and 29.23% in the last one year (as of May 23, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook.
Bottom Line
Although the year-to-date performance of the funds has been impressive, given the current economic risks that linger in China, we believe it is best to remain on the sidelines for now.
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Moody's Cuts China's Credit Rating: ETFs in Focus
Chinese stocks traded lower as Moody’s Investors Service cut the country’s credit rating from Aa3 to A1. However, it also changed the outlook to stable from negative.
The rating agency supported its argument by saying that China’s financial strength is expected to worsen due to poor economic growth and increasing debt levels. China’s total outstanding debt escalated to about 260% of GDP in 2016, reflecting an increase from 160% in the wake of the global financial crisis of 2008, per Bloomberg.
Though majority of China’s sovereign debt is held by domestic investors, this rating downgrade was not well received by the people. Although it is still in the investment grade range, it is particularly expected to increase the cost of borrowing for the government. Moreover, it comes at a time when bond yields are reaching new highs as China targets regulations to answer the financial risks it faces.
The Shanghai Composite Index opened almost 0.50% lower at market open on May 24, 2017, as investors deal with the downgrade and doubt if the government will be able to address the debt problems while maintaining its growth target.
Amongst others impacted by this surprise downgrade was the Australian dollar, often seen as a proxy hedge for China. China is one of the biggest trading partners of Australia. In 2015-2016, Australia’s total merchandise trade with China amounted to A$ 136.668 billion, as per Australian Government’s Department of Foreign Affairs & Trade. Therefore, it does not come as a shock that a downgrade of China adversely impacted the Australian dollar.
In the current scenario, let us discuss a few ETFs focused on providing exposure to Chinese equities (read: What Led China ETFs to Outperform in Q1 2017?).
iShares China Large-Cap ETF (FXI - Free Report)
This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.
It has AUM of $3.14 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy, and Information Technology are the top three allocations of the fund, with 50.66%, 12.11%, and 11.05% exposure, respectively (as of May 22, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp, and China Mobile Ltd are the top three allocations of the fund, with 11.05%, 8.91%, and 7.84% exposure, respectively (as of May 22, 2017). The fund has returned 14.03% year to date and 20.78% in the last one year (as of May 23, 2017). FXI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares MSCI China ETF (MCHI - Free Report)
This ETF is another such option to play the BRIC nation.
It has AUM of $2.40 billion and charges a fee of 64 basis points a year. From a sector look, Information Technology, Financials, and Consumer Discretionary are the top three allocations of the fund, with 36.07%, 24.09%, and 10.35% exposure, respectively (as of May 22, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR, and China Mobile Ltd are the top three allocations of the fund, with 15.79%, 11.01%, and 5.38% exposure, respectively (as of May 22, 2017). The fund has returned 22.36% year to date and 30.19% in the last one year (as of May 23, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Will Alibaba's Earnings Dull the Shine of These ETFs?).
SPDR S&P China ETF (GXC - Free Report)
This fund has AUM of $873.37 million and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials, and Consumer Discretionary are the top three allocations of the fund, with 31.36%, 23.36%, and 11.66% exposure, respectively (as of May 22, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR, and China Construction Bank Corporation are the top three allocations of the fund, with 12.63%, 9.02%, and 5.10% exposure, respectively (as of May 22, 2017). The fund has returned 20.76% year to date and 29.23% in the last one year (as of May 23, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook.
Bottom Line
Although the year-to-date performance of the funds has been impressive, given the current economic risks that linger in China, we believe it is best to remain on the sidelines for now.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>