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China's Factory Activity Data Disappoints Again: ETFs in Focus

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Declining for the sixth straight month, China’s manufacturing purchasing managers’ index (PMI) has disappointed investors again. Per the National Bureau of Statistics (NBS), PMI was 49.3 in October as against 49.8 in September. Analysts expected official manufacturing PMI to remain flat according to a Reuters’ poll. Notably, PMI reading below 50 indicates contraction while that above 50 signals expansion.

Analysts believe that a consistent decline in new export orders for the 17th straight month is largely responsible for the disappointing data. The index measuring export levels came in at 47 for October against September’s 48.2. In fact, the country also witnessed a decline in total new orders, including both export and domestic orders.

In fact, China’s non-manufacturing sector is witnessing a slowdown. The official services PMI declined to 52.8 in October from 53.7 in the previous month, the lowest level since February 2016.

Moreover, the recently-released China’s economic growth data disappointed investors. The country’s third-quarter GDP  growth of 6% year over year marked the slowest pace after first-quarter 1992. The metric also coincided with the bottom end of the Chinese administration’s target of 6-6.5% for 2019 (read: ETFs in Focus as Tariffs Hit Chinese Exports).

What’s Causing the Disappointment?

Trade war tensions with the United States have been quite damaging for China’s economy. Notably, China’s exports to the United States fell 10.7% year over year in September in dollar terms from January to September 2019. Moreover, Chinese imports from the United States contracted 26.4% year over year. Also, China’s trade surplus with the United States was $25.88 billion in September against $26.96 billion in August.

Overall, China’s export data for September lagged analysts’ expectations. Chinese exports fell 3.2% year over year in September in comparison to analysts’ expectations of a decline of 3%, per a Reuters poll.  Waning demand due to slowing global economic growth, trade war tensions and ‘front-loading’ impact might have caused the drop in export levels. Meanwhile, China’s import levels in September declined 8.5% year over year in comparison to analysts’ expectations of a 5.2% drop. (read: Time to Buy Global Low-Volatility ETFs?).

Weakening domestic and global economies led to sluggishness  in some major components like freight shipments, factory power generation, employment and entertainment spending. In fact, factory gate prices declined the fastest in three years.

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) 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 $4.40 billion and expense ratio is 0.74% (read: ETFs in Focus as China's Economic Slowdown Persists).

MCHI

This fund tracks the MSCI China Index. It comprises 461 holdings. The fund’s AUM is $3.82 billion and expense ratio is 0.59% (read: ETF Winners as Sino-US Trade War Tensions Ebb).

ASHR

This fund tracks the CSI 300 Index. It comprises 309 holdings. The fund’s AUM is $1.71 billion and expense ratio is 0.65% (read: Should You Buy China ETFs Now?).

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 66 stocks. The product has AUM of $184.4 million and charges 70 bps in annual fees (read: Dump Slowdown Fear, Bet on These China ETFs).

Looking Forward

The trade war made quite an impact on China’s economy as evident from falling export and imports levels, decreasing jobs, declining business and consumer confidence, and shrinking investments. In this regard, Shanghai-based economist at Hwabao Trust, Nie Wen has said “given exports are unlikely to stage a comeback and a possible slowdown in the property sector, the downward pressure on China’s economy is likely to continue, with fourth-quarter economic growth expected to slip to 5.9%.”

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