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China Slowdown Could Impact Tech ETFs

This article was originally published on ETFTrends.com.

U.S. companies with heavy exposure to China could be affected if China's efforts to trim the growth of corporate debt prompt a slight economic slowdown. Some analysts and economists believe U.S. industrial and technology companies would be affected.

“U.S. technology and industrial companies are heavily indexed to China but Fitch believes the near-to-intermediate term financial impact of slower than expected GDP growth would pose only modest risk, due to numerous drivers of demand and offsetting cost benefits,” said Fitch Ratings in a note out Monday.

The Technology Select Sector SPDR Fund (XLK) , the largest tech-related ETF, and the PowerShares QQQ (QQQ) , which tracks the tech-heavy Nasdaq-100 Index, feature an array of companies with heavy exposure to China, the world's second-largest economy.

While China has produced solid growth numbers, the economy is showing signs of slowing. Chinese factories were producing fewer goods for foreign buyers even before the recent trade war talks with Washington. Enthusiasm over company stocks of big state-owned companies has also declined in recent months after investors jumped on them last year.

Solid Fundamentals for Tech

Although there are concerns regarding China, the technology sector's fundamentals remain compelling.

“Within technology, long-term secular demand drivers including digital transformation of mechanical/analog content, explosive data growth, and the continuing migration of workloads from on-premise computing resources to public data centers and cloud services, position issuers for long-term growth irrespective of the economic environment in China,” according to Fitch.

Related: What is Behind China’s Top-Ranked Fundamentals?

XLK includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services.

“The strong relationship between the U.S. and China in technology is driven in part by global supply chain needs for components such as semiconductors and hardware such as smartphones, along with China's articulated drive to develop a vibrant indigenous technology sector,” said Fitch. “However, U.S. technology firms have increased diversification across end markets, which strengthens credit profiles for certain categories. Technology firms generating significant revenue from China include Texas Instruments, Flex Ltd, Intel, Western Digital, and Jabil.”

China is on a path toward an ambitious reform agenda focusing on the quality of growth instead of relying on quantity, including environmental protection, continued cuts to excess capacity and reducing excessive credit growth.

For more information on Chinese markets, visit our China category.