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China ETFs: Buy the Dip?

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China investing has been in dire straits this year thanks mainly to trade war tensions with the United States. The four-month old battle of rhetoric has now became reality with two countries announced tit-for-tat tariffs on $50 billion of each other’s goods. If this was enough, President Trump now plans to slap tariffs on an additional $200 billion in Chinese goods (read: Beyond China, These Asia ETFs to Feel the Heat of Trade War).

This sent Chinese Stocks into a bear market in late June. Most of the China ETFs have been in the red this year. KraneShares CSI China Internet ETF (KWEB - Free Report) witnessed the highest year-to-date gains of 1.52% (as of Jul 10, 2018), while Xtrackers Harvest CSI 500 China-A Shares Small Cap Fund (ASHS - Free Report) lost the most (down 19.3%). In fact, ASHS was down the most in the last three-month frame too, having lost about 18.8%.

Is It Time to Buy the Dip?

Chinese stocks may offer 20% over the next three years despite the trade conflicts, per the founder and chief investment officer of APS Asset Management Pte in Singapore.  If tensions over trade and technology fade out, the gain could skyrocket as much as 50%, as quoted on Bloomberg.  Shenzhen PaiPaiWang Investment & Management Co. also sees the recent stressed valuation as a good entry point.

In a bid to strengthen the economy amid trade conflicts with the United States and to restore investor confidence, The People’s Bank of China (PBOC) lowered the amount of cash that some banks (which is known as the reserve requirement ratio) need to keep as reserve by 50 basis points (bps) from Jul 5 (read: Will a Reserve Ratio Cut Make a Difference for China ETFs?)

The move is expected to free $108 billion in liquidity to quicken the clip of debt-for-equity swaps, boost lending to smaller firms and strengthen the economy. Particularly, mid-sized and small banks will see a 200-billion increase in funding from the RRR cut, which is targeted at turning around struggling or cash-strapped small businesses.

Moreover, China cut its value-added tax (VAT) rates, as part of an RMB 400 billion tax cut package in April. VAT were reduced to 16% from 17% for the sale of goods, and to 10% from 11% for transportation, logistics and construction services.

The government also planned in late April to widen “the qualification criteria for the preferential 3% VAT rate applied to smaller businesses and startups.” Per Zhongtai Securities, the new rates will result in more than 100-billion-yuan savings for manufacturers alone.Also, China’s housing market is heating up.

Mainland-listed shares, or A-shares have recently been added into MSCI Inc.’s benchmark indices. The move bolsters China’s standing as a major investment destination in the world.

ETFs to Play

Global X NASDAQ China Technology ETF ) – Down 5.31% YTD

Analysts’ bet is for the Chinese tech space like cyber security, big data and semiconductor industries, though these are fraught with risks given the trade war fears. Still, investors bullish on the Made in China 2025 program that revolves around augmenting cutting-edge industries like robotics, new energy-vehicles, chips and software, may find tech stocks over lucrative long-term bets.

The 47-holding fund 65 bps in fees. Software & Services take about 62.8% of the fund followed by Technology Hardware & Equipment (27%) (see all Technology ETFs here).

SPDR S&P Internet ETF(XWEB - Free Report) – Up 1.52%

The 71-stock fund charges 35 bps in fees. Internet Software & Services industry takes about 79.5% of the fund.

 iShares MSCI China Small-Cap ETF ((ECNS - Free Report) – Down 0.05%

Given China’s efforts to shore up small companies, investors may consider the fund. Consumer Discretionary, Information Technology, Real Estate and Industrials get the double-digit exposure to this 302-stock fund.

KraneShares CSI China Five Year Plan ETF (KFYP - Free Report) – Down 0.9%

Since reforms — whether financial or demographic — are pretty rampant in China right now, investors can have a look at this ETF (read: Follow These ETFs as China's 19th National Congress Begins).

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