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China Industrial Profits Drop for 2 Months: ETFs in Focus

Zacks Equity Research
Halliburton (HAL) closed the most recent trading day at $21.68, moving -0.46% from the previous trading session.

On Jan 28, China showed further signs of cooling as profits for industrial companies fell for the second consecutive month. In December 2018, industrial profits dropped 1.9% annually to 680.8 billion yuan ($100.9 billion) owing to weak factory-gate prices and soft demand. Per National Bureau of Statistics (NBS), profits at chemical, coal mining and non-ferrous metal sectors fell significantly in December (see: all the Asia-Pacific (Emerging) ETFs here).

For 2018, China’s industrial profits rose 10.3%, slowing down from 21% achieved in 2017. By the end of December 2018, the debt-to-asset ratio of Chinese industrial companies stood at 56.5%, down 0.5% from a year ago. Debt-to-asset ratio of state owned enterprises declined 1.6% to 58.7% in the same time period.

Oil and gas mining were the most profitable sectors of 2018, with profits more than quadrupling. Other profitable sectors included ferrous nonmetallic minerals products, ferrous metal smelting, chemical products manufacturing and alcohol & beverage. Sectors experiencing a fall in profits included tobacco, paper-making, auto-manufacturing, non-ferrous smelting, computer and telecommunication equipment production.

The year 2018 marked the beginning of trade tensions between the two largest economies of the world. China’s economy seems to be the most affected by the trade spat. While the fourth-quarter gross domestic product (GDP) grew at the weakest clip of 6.4% since the financial crisis of 2009, the overall growth rate achieved by China for 2018 was 6.6% — a 28-year low (read: China's 2018 GDP Growth 28-Year Low: ETFs That Lost the Most).

More Trouble Ahead?

Per Nomura analysts, the downward trend of industrial profits is likely to continue due to weakening demand, falling price inflation and the ongoing credit down cycle. Though traders are working on replenishing inventory levels ahead of Lunar New Year holiday in early February, demand is weak. New orders — an indicator of future activity — contracted for the first time in at least a year in December.

Per a recent survey conducted by the state planner, activity levels at 2,500 Chinese small and mid-sized enterprises continued to contract in the fourth quarter despite support from government policies.

Such a consecutive burst of downbeat data signals more trouble ahead for the manufacturing sector that is already struggling with a glut of issues like a decline in orders, job layoffs and factory closures. 

Stimulus Measures

The struggles of the economy are exerting pressure on policymakers to support industries. However, there is limited room for aggressive stimulus in an economy already laden with massive debts and a property market prone to credit-driven spikes, per a policy insider.

The policy makers have shown signs of initiating stimulus measures. Beijing has vowed to increase spending on infrastructure projects in 2019 and provide a boost to consumption in areas such as automobile and home appliances. The state-run enterprise China Railway is planning a record-high investment of about 850 billion yuan ($125 billion) in 2019 (read: ETFs in Focus on China Rate Cut).

Economists believe that the government may cut taxes and boost spending on infrastructure amid expectations that the budget deficit ratio could be raised to 3% in 2019 from 2.6% last year, as quoted on Reuters.

China ETFs in Focus

China ETFs have been performing strongly over the past four weeks in anticipation of major developments in trade talks and stimulus measures adopted by the government. Washington and Beijing are scheduled to hold trade talks this week, and if a long-term trade deal is reached between the United States and China, it will give a solid boost to these ETFs.  Against this backdrop, we highlight five popular China ETFs in detail (read: U.S., China to Reach a Trade Deal? ETF Areas to Gain):

iShares China Large-Cap ETF FXI

The fund tracks the FTSE China 25 Index, which follows the performance of the largest companies in the Chinese equity market. It comprises 50 holdings. The fund’s AUM is $6.0 billion and expense ratio is 0.74%. It has returned 8.0% in the past four weeks (as of Jan 25). The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 10 Most-Heavily Traded ETFs of 2018).

iShares MSCI China ETF MCHI

The fund tracks the MSCI China Index and comprises 302 holdings. Its AUM is $4.1 billion and expense ratio is 0.59%. It has returned 9.6% in the past four weeks. The fund has a Zacks ETF Rank #3 with a Medium risk outlook

KraneShares CSI China Internet ETF KWEB

The fund tracks the CSI China Overseas Internet Index, which includes publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors. It comprises 52 holdings. The fund’s AUM is $1.2 billion and expense ratio is 0.70%. It has returned 12.5% in the past four weeks. The fund has a Zacks ETF Rank #3 with a High risk outlook.

Harvest CSI 300 China A-Shares Fund ASHR

The fund tracks the CSI 300 Index, reflecting price fluctuation and performance of the China A-share market. It comprises 315 holdings. The fund’s AUM is $1.2 billion and expense ratio is 0.66%. It has returned 8.5% in the past four weeks. The fund has a Zacks ETF Rank #3 with a High risk outlook (read: Risk-On Trade is Back: ETFs That Gained the Most).

SPDR S&P China ETF GXC

The fund tracks the S&P China BMI Index and comprises 641 holdings. It has AUM of $971.7 million and expense ratio is 0.59%. It has returned 9.6% in the past four weeks. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.

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iShares MSCI China ETF (MCHI): ETF Research Reports
 
SPDR S&P China ETF (GXC): ETF Research Reports
 
iShares China Large-Cap ETF (FXI): ETF Research Reports
 
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