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China Cuts Rate for Fourth Time: ETFs in Focus

Zacks Equity Research
China cuts reserve requirement ratio for the fourth time to boost infrastructure and combat trade war woes, putting related ETFs in focus.

For the fourth time this year, the People’s Bank of China (PBOC) will be cutting rates. The PBOC said on Oct 7 that it will cut the reserve requirement ratio (RRR) by 100 basis points, infusing nearly $109.2 billion cash into the banking system (see: all Asia-Pacific (Emerging) ETFs).

The RRR is currently 15.5% for large institutions and 13.5% for smaller banks. The cut follows persistent debt issue and escalating tit-for-tat tariffs between Beijing and Washington. Chinese stocks weakened post week-long holidays, with the major indexes in both Shanghai and Shenzen down nearly 3.7% at close on Oct 8. During these holidays, the yuan fell below 6.9 against dollar.

From Oct 15 onward, RRR will be reduced for large commercial banks, joint-stock commercial banks, city commercial banks, rural commercial banks and foreign banks. This rate cut is a much-needed step to pump billions of dollars in infrastructure projects as investment growth is declining to a record low. Fixed asset investment, a key metric measuring economic growth expanded by 5.3% in the January-August period on a year-over-year basis, which is lower than 5.5% in the January-July, the lowest level on record.

Per PBOC, 450 billion yuan ($65 billion) will be used to settle the medium-term loan facilities that expire on Oct 15. The central bank uses these kinds of facilities to manage the short-term and long-term liquidity in banking system. The remaining 750 billion yuan ($110 billion) will be used for market-lending purposes. This increased cash with the banks would aid the private businesses to access more credit as the fortunes look dim for their products in the United States — the second-largest market after the European Union.

Yuan is looking increasingly unattractive as the difference between Chinese and U.S. 10-year treasury bonds has been at its 7-year low in the past week. China’s foreign exchange reserves have dipped for two consecutive months with the currency depreciating 3.5% this year. Manufacturing fell to its lowest level in 16 months (read: Treasury Yields at New 7-Year High: ETF Strategies to Play)

"The PBOC will continue to take necessary measures to stabilize market expectations and keep the foreign exchange market running smoothly,’’ it said (read: 4 ETF Picks for October).

The following Chinese ETFs could expect some pricing action following this rate cut:

iShares China Large-Cap ETF FXI

It tracks the FTSE China 25 Index. AUM is $4.8 billion and the expense ratio is 0.74%. It has lost 10.3% year to date.

iShares MSCI China ETF MCHI

It tracks the MSCI China Index. AUM is $3.2 billion and expense ratio is 0.62%. It has lost 14.5% year to date.

KraneShares CSI China Internet ETF KWEB

It tracks the CSI China Overseas Internet Index. AUM is $1.4 billion and expense ratio is 0.70%. It has lost 23.3% year to date.


It tracks the S&P China BMI Index. AUM is $985 million and expense ratio is 0.59%. It has lost 14.2% year to date.

Xtrackers Harvest CSI 300 China A-Shares Fund ASHR

It tracks the CSI 300 Index. AUM is $960 million and expense ratio is 0.65%. It has lost 21% year to date.

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DEUTS-XT HV CS3 (ASHR): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
SPDR-SP CHINA (GXC): ETF Research Reports
ISHARS-MS CH IF (MCHI): ETF Research Reports
KRANS-C CHN INT (KWEB): ETF Research Reports
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