After releasing inflation data that beat market expectations last week, China's economy is finally showing signs of cooling. Economic expansion in the world's second-largest economy slowed as it posted slowest investment growth in nearly 18 years and retail sales and factory output missed expectations.
Economic Data Misses Expectations
China's industrial output grew 6.0% year over year in August compared with 6.4% in July, and below Reuters forecast of 6.6%. It is being said that China's efforts to tackle pollution might have had led to this slowdown, as it looks to close old inefficient mines that are contributing to the pollution problem being faced by the country.
Moreover, retail sales grew 10.1% year over year in August compared with 10.4% in July and below Reuters forecast of 10.5%.
Earnings for industrial firms have been impressive, as prices of raw materials such as cement and steel have been gaining owing to the government led construction boom. Although this has been driving growth in the economy and has been a major factor driving inflation, recent data suggests slowing momentum.
Moreover, as the government continues its efforts to reduce riskier financing to tackle China's debt problem, prices are expected to decrease as consumer, as well as corporate borrowing, becomes costlier (read: China's Inflation, Debt & Impact on Australia: ETFs in Focus ).
A major growth driver for the Chinese economy, fixed-asset investment grew 7.8% in the January-August period compared with 8.3% in the January-July period.
Economic Growth and Inflation
China's GDP has been growing at a rapid pace. It increased 6.9% year over year in the second quarter of 2017, same as the first quarter. China reported a strong first half of 2017 but data released for July showed signs of fading GDP (read: China Q2 GDP Beats Expectations: ETFs in Focus ).
Despite the slowdown, the Chinese economy seems on track to achieve the government's target growth of 6.5% for the year.
China's consumer price index (CPI) increased 1.8% year over year in August compared with 1.4% in July, a seven-month high, per data released by National Bureau of Statistics. It surpassed economists' expectations of a 1.6% gain. China's producer price index increased 6.3% year over year in August compared with 5.5% in July, a four-month high. It surpassed economists' expectations of a 5.7% gain.
Geopolitical Risks
The Chinese economy is also subject to the prevailing geopolitical risks. North Korea conducted its seventh nuclear test, an Inter Continental Ballistic Missile that flew over Japan, on Sep 14, 2017. Kim Jong-Un's actions have created huge unrest in a number of Asian economies and the United States (read: Safe Haven Currency ETFs Gain, Dollar Loses Amid Geopolitical Uncertainty ).
The North Korean economy is heavily dependent on trade with China, as 90% of North Korea's overall trade is with China. U.N. passed fresh sanctions on North Korea on Sep 11, 2017. The sanctions are aimed at starving North Korea of oil to run its nuclear program by reducing oil imports by the country. Although the United States had aimed at total oil embargo on North Korea, sanctions were watered down in order to secure China and Russia's support, as they held veto power on the decision.
With North Korea continuing with its nuclear tests, other countries will definitely create pressure on China to take a strict rhetoric on trade with North Korea.
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 ETFFXI
This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.
It has AUM of $3.46 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 three allocations of the fund, with 52.75%, 10.96% and 10.01% exposure, respectively (as of Sep 13, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp and Industrial and Commercial Bank of China are the top three allocations of the fund, with 10.01%, 8.65% and 7.26% exposure, respectively (as of Sep 13, 2017). The fund has returned 25.2% year to date and 16.0% in a year (as of Sep 14, 2017). FXI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares MSCI China ETFMCHI
This ETF is another such option to play the BRIC nation.
It has AUM of $2.56 billion and charges a fee of 64 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 39.97%, 22.59% and 10.06% exposure, respectively (as of Sep 13, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corp are the top three allocations of the fund, with 16.17%, 13.56% and 4.82% exposure, respectively (as of Sep 13, 2017). The fund has returned 42.8% year to date and 30.6% in a year (as of Sep 14, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Here's Why China Tech ETFs Are Surging ).
SPDR S&P China ETFGXC
This fund has AUM of $1.03 billion and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 34.89%, 21.70% and 11.26% exposure, respectively (as of Sep 13, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top three allocations of the fund, with 12.98%, 11.35%, and 4.59% exposure, respectively (as of Sep 13, 2017). The fund has returned 41.3% year to date and 28.7% in a year (as of Sep 14, 2017). GXC currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
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ISHARS-CHINA LC (FXI): ETF Research Reports
SPDR-SP CHINA (GXC): ETF Research Reports
ISHARS-MS CH IF (MCHI): ETF Research Reports
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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