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Will China ETFs Survive the Moving Out of US Firms?

Sweta Jaiswal, FRM

In an attempt to escape Trump’s heavy tariffs on Chinese imports, U.S. companies with manufacturing units in China are increasingly shifting to Southeast Asian countries like India, Vietnam, Cambodia, Malaysia, the Philipines, Bangladesh and Ethiopia. These companies mostly belong to sectors like technology, clothing and footwear.

One of the American Chamber of Commerce’s surveys in China showed that 40% of such companies are either planning or have shifted manufacturing operations from China. Top global names like Apple Inc. AAPL, Alphabet Inc. GOOGL and Nintendo Co., Ltd. NTDOY along with other major companies have already shifted or are considering the same. Dell Technologies Inc. DELL and Hewlett Packard Enterprise Company HPE are also planning to shift around 30% of their notebook production in China to Southeast Asian and other regions.

It is worth noting here that some companies based in the European Union are also a part of the league. In this regard, a recent survey conducted by the quality control and supply chain auditor QIMA showed that among the companies heading out of China, 67% were based in the European Union while 80% were US-based firms.

Factors Behind the Move

Most U.S. manufacturing concerns were already shifting out due to high production and transport expenses in China in comparison to other Asian countries. They believe that the trade war has just accelerated the process.

Consumer electronic items like smartphones, laptops, smart speakers, routers, and home IOT products face tough price competition and therefore price hikes to cover the tariffs may make these products exorbitant. 

Furthermore, there is high uncertainty whether the truce talks between the countries will reach any conclusion. If statistics are to be believed, 11 rounds of talks between the presidents have failed so far. Such failures were usually followed by a revision of existing or imposition of new tariffs. In this regard, Trump mentioned in one his recent statements that the tariffs are being postponed for the “time being” and any failure in resolution might lead to imposition of fresh tariffs.

How Hard Can the Blow be for China?

China’s economy is witnessing a tumultuous phase. The world’s second-largest economy grew at 6.2% between April and June in comparison to 6.3% median prediction from a poll of 14 economists, conducted by The Wall Street Journal. The GDP number also lagged 6.4% growth recorded in the first quarter of 2019. However, the economic growth figure lies within Beijing’s target growth rate range of 6-6.5% for 2019.

Trade tensions heightened after Trump dealt fresh attacks in the latest round of the trade war. The U.S. President raised tariffs to 25% from 10% on Chinese goods worth $200 billion effective May 10 midnight, and has threatened to levy another 25% tariff on an additional $325 billion of Chinese goods. In retaliation, China announced imposition of as much as 25% tariff on U.S. imports worth $60 billion effective Jun 1 (read: US-China Truce Talks Begin: ETFs to Shine).

The country’s export and import numbers are also dismal. On one hand, imports slipped to worse-than-expected levels in June while on the other, export data was sluggish. Notably, exports fell 1.3% in June from the year-ago period while imports declined 7.3%. Slackening global economic growth also affected the trade numbers for the Chinese economy. Furthermore, factories were observed to be on a job-cut spree. According to a Wall Street Journal article, U.S. Census Bureau states that there was a 12% decline in imports from China through January to May in 2019. Given the scenario, this reordering of global supply chain process will further lead to a decline in Chinese export levels.

Moreover, the relocation of manufacturing facilities can be detrimental to the employment levels in China. Brooks Running commented in May that it plans to shift majority of its operations to Vietnam by 2019-end. This in turn will end up in moving around 8000 jobs to Vietnam from China.

ETFs in Focus

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

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 $5.53 billion and expense ratio is 0.74%. The fund has returned 8.7% year to date (read: China's Discouraging Figures Hit Investors: 5 ETFs in Focus).

MCHI

This fund tracks the MSCI China Index. It comprises 392 holdings. The fund’s AUM is $4.35 billion and expense ratio is 0.59%. It has returned 12.8% year to date (read: ETFs to Tap on Alibaba's Revenue Growth in Q4).

ASHR

This fund tracks the CSI 300 Index. It comprises 310 holdings. The fund’s AUM is $1.65 billion and expense ratio is 0.66%. The fund has returned 26.9% 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 $1.58 billion and expense ratio is 0.70%. The fund has returned 14.2% year to date (read: 5 Tech ETFs Losing the Most on Huawei Ban: What's Ahead?).

Bottom Line

Manufacturers are facing quite a number of challenges in their effort to shift from China. For instance, lack of proper infrastructural facilities like roads, airports or ports in other countries is a major deterrent. Sometimes U.S. manufacturing companies come under the radar of the U.S. government when they relocate to escape tariffs. In this regard, a Wall Street Journal report for June stated that large quantities of Chinese-made goods were being rerouted through Vietnam, Malaysia and the Philippines to dodge tariffs.

Meanwhile, some U.S. companies are bound to pay huge tariffs due to lack of appropriate alternatives for some China-made goods.  Moreover, certain companies are planning to continue manufacturing in China in order to meet demand of the local Chinese population. However, all hopes are pinned on the ongoing Sino-US truce talks, although no immediate solution is in sight.

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Hewlett Packard Enterprise Company (HPE) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Dell Technologies Inc. (DELL) : Free Stock Analysis Report
 
iShares MSCI China ETF (MCHI): ETF Research Reports
 
iShares China Large-Cap ETF (FXI): ETF Research Reports
 
Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR): ETF Research Reports
 
Nintendo Co. (NTDOY) : Free Stock Analysis Report
 
KraneShares CSI China Internet ETF (KWEB): ETF Research Reports
 
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