Back to top

Image: Bigstock

China's Industrials Growth at 17-Year Low: ETFs in Focus

Read MoreHide Full Article

China’s industrial production growth in July has highly disappointed investors. Battered by escalating trade war tensions, the industrial growth rate in July slipped to the lowest level since February 2002. China’s retail sales growth was also weak indicating softening consumption levels.

What do the Numbers Say?

China witnessed 4.8% industrial production growth in July over the previous year. The figure which includes output of the industrial sectors, including manufacturing, mining and utilities in the China economy, also lagged forecasts of 6% growth in a Bloomberg poll and 5.8% growth in a Reuters poll. The July reading also compares unfavorably with 6.3% industrial production growth recorded in June and May’s 5% growth rate.Going into details of the industrial production figures, manufacturing sector saw 4.5% growth in July in comparison with June’s 6.2%. Meanwhile, the mining sector witnessed 6.6% growth comparing unfavorably with 7.3% growth in June.

Additionally, the July retail sales grew 7.6%,missing economists’ forecast of 8.6% growth. The metric also compares unfavorably with 9.8% growth rate in June.

Factors Behind the Downside

The ongoing Sino-US trade war has been affecting China’s economy. The U.S. President raised tariffs to 25% from 10% on Chinese goods worth $200 billion, effective May 10 midnight. Moreover, in the first week of August, Trump had announced a 10% tariff on the remaining Chinese imports worth $300 billion. The new tariff was planned to be implemented on Sep 1. China retaliated with tariffs on $110 billion of American goods to date, including agricultural products. But in a retaliatory move to the new round of tariffs, China devalued its currency to an 11-year low and stopped purchases of U.S. farm products (read: ETF Areas Under Focus on China's Yuan Devaluation).

However, alleviating the tensions, Trump recently announced plans to delay tariffs on certain goods in the list of $300 billion of Chinese imports that were subject to 10% tariffs from Sep 1 until Dec 15. Per a Reuters article, U.S. tariffs will now be implemented on above $125 billion worth of Chinese imports from Sep 1.

Dismal import numbers are continuously pointing toward softening demand and weakening consumption in the Chinese economy. Per data published by the General Administration of Customs, there was a 5.6% decline in imports to $175.47 billion in July.

Fixed-asset investment growth came in at 5.7% year over yearfor the first seven months of 2019, missing expectations of 5.8% year-over-year growth. Moreover, government stimuli in the form of massive local government bond issuance, majorly to fund road and rail projects and other civic works, could not maintain infrastructure investment growth. The metric rose 3.8% from January-July 2019 in comparison to 4.1% in the first half of 2019. Additionally, property investment rising 8.5% year over year, stood at the weakest level in July 2019.

What to Expect?

Although the decision to delay the tariffs has cheered investors, the same left a specific group of analysts and business houses dissatisfied. Some analysts believe that the speed at which ‘attacks and retaliations’ are taking place followed by the decision reversals in this trade-war game, it is increasing the ambiguity and uncertainty in global markets. Such periods of high volatility and uncertainty keep investors on edge while making it difficult for business houses to plan out a strong and concrete business strategy and capital expenditures.

China is making an all-out effort to keep the growth momentum steady in the economy. However, analysts are growing apprehensive about waning demand, thanks to the slump in Chinese imports. However, analysts from Nomura expect the Chinese economy growth to slump to 6% year over year in the third and the fourth quarters of 2019, meeting the low end of the government’s guidance.

ETFs in Focus

Against this backdrop, investors can keep a tab on a few China ETFs like iShares China Large-Cap ETF (FXI - Free Report) , iShares MSCI China ETF (MCHI - Free Report) , Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR - Free Report) , KraneShares CSI China Internet ETF (KWEB - Free Report) and Invesco Golden Dragon China ETF (PGJ - Free Report) .

FXI

This fund seeks long-term growth by tracking the investment returns, before fees and expenses, of the FTSE China 50 Index. It comprises 50 holdings. The fund’s AUM is $4.60 billion and expense ratio is 0.74%. The fund has lost 2.3% year to date (read: Will China ETFs Survive the Moving Out of US Firms?).

MCHI

This fund tracks the MSCI China Index. It comprises 392 holdings. The fund’s AUM is $3.56 billion and expense ratio is 0.59%. It has returned 3.8% year to date (read: Fed & Trade Trigger Market Bloodbath: 6 Hot Inverse ETF Areas).

ASHR

This fund tracks the CSI 300 Index. It comprises 310 holdings. The fund’s AUM is $1.36 billion and expense ratio is 0.66%. The fund has returned 20.4% year to date.

KWEB

This fund tracks the performance of the CSI Overseas China Internet Index. It comprises 43 holdings. The fund’s AUM is $1.42 billion and expense ratio is 0.70%. The fund has returned 5.6% year to date (read: 5 Tech ETFs Losing the Most on Huawei Ban: What's Ahead?).

PGJ

This fund follows the NASDAQ Golden Dragon China Index, which offers exposure to the U.S. exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. It holds a basket of 68 stocks. The product has AUM of $173.5 million and charges 70 bps in annual fees. The fund has returned 9.4% year to date (read: A Spread of Top-Ranked ETFs That Crushed the Market in Q1).

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 >>