China’s 19th National Congress of the Communist Party, a seven-day long meeting starting Oct 18, is the biggest event that will determine core leaderships in following five years. Along with many other analysts, we too believe that the meeting is all about politics but cues for economic policies scheduled in the next five years will also be looked for by investors.
The meeting is expected to further strengthen the position for President Xi Jinping in his second five-year term. Against such a backdrop, the following factors will likely be addressed in the meeting and have an impact on the broader ETF investing world.
Upbeat Economic Growth in the Cards?
China is to report its third-quarter GDP growth on Oct 19. Recently, central bank governor Zhou Xiaochuan indicated that the economy may expand 7% in the year's second half against 6.9% in the first six months. This likely upside in the GDP picture sent China's 10-year treasury futures decline to the “lowest level in nearly five months on Oct 17.”
As per an emerging markets portfolio manager at asset management group Comgest, there are chances that China will opt for "lower quality" high-percentage GDP growth fueled by government forces instead of "better quality, self-sustained" lower GDP growth, quoted on CNBC.
The CNBC article went on to point out that China is trying to attain 6.5% growth this year, and planning to achieve the similar goal in the next few years too. This high standard doesn’t give the administration much opportunities for “structural reforms, as growth is mostly propped up by external demand and government stimulus now,”according to a senior emerging markets economist at Aberdeen Standard Investments.
However, what China thinks about its future growth can be understood after the meeting ends. This puts KraneShares Zacks New China ETF KFYP on investors’ radar. KFYP follows the Zacks New China Index which provides exposure to companies listed in Mainland China, Hong Kong and the United States whose primary business or businesses are important in the current Five-Year Plan of the central Chinese government.
The sectors expected to benefit from China's Five-Year Plan are assessed and the stocks within each sector are then screened on the basis of various investment factors, including price, cash flow, free cash flow, momentum and volatility. Sinotruk Hong Kong Ltd, Haitian International Hld and Guangzhou Baiyunshan are the top three holdings of the fund.
Exchange Rate & Financial Sector to be Strengthened?
Chinese President Xi Jinping also indicated that “China will relax market access for foreign investment and expand access to its services sector, as well as deepen market-oriented reform of its exchange rate and financial system, while at the same time strengthening state firms.”
This very comment puts WisdomTree Chinese Yuan Fund CYB, CurrencyShares Chinese Renminbi Trust FXCH, Market Vectors-Renminbi/USD ETN CNY in focus. Notably, the fund CYB was up about 9.5% (as of Oct 17, 2017).
Also, China “opened up the domestic bond market and the fund management sector to foreign companies.” All these efforts put financials-heavy iShares China Large-Cap ETF FXI in focus. If investors’ access to the A-shares become more seamless, funds like Deutsche X-trackers Harvest CSI 300 China A-Shares Fund ASHR and KraneShares Bosera MSCI China A Share ETF KBA) can enjoy some benefits (read: ETF Winners & Losers from MSCI Index Review).
Plus, if the solidifying of the state firms happens for real, investors shying away from WisdomTree China ex-State-Owned Enterprises Fund CXSE may lose some benefit. Then again, state-owned enterprises are known for huge corporate debt, which goes against state firm investing.
Xi is known for anti-graft campaign. In this context, we would like to note that Macau, a Chinese territory, has struggled a lot due to the anti-graft corruption drive, which lowered footfall at the casinos. While things have improved significantly in recent times, investors still should keep a tab on VanEck Vectors Gaming ETF BJK.
China’s Take on Pollution Control
China, the world's largest car market, intends to put an embargo on the manufacturing and sale of diesel and petrol cars and vans. If any push to this move is noticed in the ongoing meeting, KraneShares MSCI China Environment ETF KGRN should come into prominence.
The People's Bank of China quoted its governor citing strong household spending. This makes the case for small-cap investing stronger. iShares MSCI China Small-Cap ETF ECNS, Guggenheim China Small Cap ETF and Global X China Consumer ETF CHIQ may gain strength from this move.
Added to this, there are factors about “industrial supply over-capacity and concerns about a property bubble” as quoted on CNBC. Investors thus should closely monitor broader China-based ETFs like iShares MSCI China ETF (MCHI) and SPDR S&P China ETF GXC (read: ETFs to Lose If Trump Bans Trade With North Korean Partners).
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