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China ETFs to Watch Amid Signs of Weak Economic Growth

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The world’s second-largest economy exhibited strong performance last year. China’s economy grew 6.9% in 2017 compared with 6.7% in the previous year, marking the first annual acceleration since 2010.

However, the emerging market nation saw a glum first quarter of 2018, as it faces risks like a crackdown on pollution, increasing financial threats and possibilities of a trade war with Trump-led United States. Adding to the woes, recent data on Consumer and Producer price inflation shows signs of a further slowdown in economic growth.

Into the Headlines

China’s producer prices slowed to a 17-month low of 3.1% in March compared with 3.7% in the previous month, on a year-over-year basis. Rising borrowing costs have weighed on the emerging market nation, as producer prices slowed for the fifth month in a row.

Although the Chinese economy has exhibited strong positive trends in the first two months of the year, recent data shows a build-up of increased worries with muted demand weighing on GDP growth. It should be noted that economic data from China in the first two months of a year are considered to be distorted, caused by a week-long holiday for Lunar New Year celebrations that fell in mid-February this year (read: What Lies Ahead for China ETFs?).

Consumer prices increased 2.1% in March compared with 2.9% in February. The numbers in February seemed to be distorted, owing to a one-off increase in demand due to Lunar New Year celebrations.

Risks Involved

Although geopolitical risks involving North Korea are not bothering the markets at the moment, as North Korea’s Kim Jong-Un has offered to hold potential denuclearization talks with Trump, a slew of other factors are troubling China’s market (read: An End to North Korea Fears? ETFs to Watch).  

From a domestic perspective, the Chinese government is aiming to crack down on high debt levels and pollution intensive industries, to transform the manufacturing oriented economy to a more balanced one.

Moving on to trade, tensions between Washington and Beijing have abated somewhat. However, given the highly volatile nature of these talks, nothing can be said with certainty.

After Trump announced tariffs on $50 billion worth of Chinese goods, China retaliated with tit-for-tat tariffs of $50 billion on U.S. goods. Although Trump is weighing another $100 billion worth of tariffs, China’s President Xi Jinping made a speech that calmed investors.

“We encourage normal technological exchanges and cooperation between Chinese and foreign enterprises, and protect the lawful intellectual property rights owned by foreign enterprises in China,” Xi said. He also promised to reduce tariffs on automobiles although there was no detail on the amount of reduction.

Let us now discuss a few ETFs focused on providing exposure to the Chinese economy (see all Asia-Pacific Emerging ETFs here).

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 $4.6 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 allocations of the fund, with 48.6%, 11.6% and 11.3% exposure, respectively. From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top allocations of the fund, with 9.0%, 8.7% and 8.4% exposure, respectively. The fund has returned 27.7% in a year. FXI has a Zacks ETF Rank #2 (Buy) 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 $3.6 billion and charges a fee of 62 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 40.0%, 23.1% and 9.2% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corp are the top allocations of the fund, with 18.1%, 11.9% and 5.2% exposure, respectively. The fund has returned 39.6% in a year. MCHI has a Zacks ETF Rank #2 with a Medium risk outlook.

SPDR S&P China ETF (GXC - Free Report)

This fund has AUM of $1.2 billion and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top allocations of the fund, with 35.4%, 22.9% and 10.3% exposure, respectively. From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top allocations of the fund, with 15.1%, 10.3% and 5.8% exposure, respectively. The fund has returned 37.7% in a year. GXC has a Zacks ETF Rank #2 with a Medium risk outlook.

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