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ETFs in Focus on China's Economic Slowdown in August

Sweta Jaiswal, FRM

A Bloomberg Economics gauge assessing the earliest available indicators recently showed a persistent slump in China’s economic growth due to tough external conditions as well as weakening domestics market in August. Escalating trade tensions with the United States and a slowing global economy are impeding China’s economic growth. However, the official Purchasing Manager Index reading is yet to be released. Meanwhile, analysts are of the opinion that the figures for August will disappoint given the unsatisfactory industrial growth in July (read: China's Industrials Growth at 17-Year Low: ETFs in Focus).

Factors Behind the Downside

The trade war with United States has been affecting China’s economy. Responding to President Trump’s early August attack, China imposed new tariffs of 5% to 10% on $75 billion worth of goods from the United States, effective on some items from Sep 1 and others from Dec 15. The raised duties will be levied on nearly 5,078 U.S. products, including agricultural goods like soybeans and coffee along with whiskey, seafood, aircraft and crude oil. Moreover, effective Dec 15, China has decided to reinstate a 25% tariff on U.S. automobiles or 5% on auto parts (read: 4 Dividend ETFs to Ride Out Trade War Uncertainty).

Baffled by the Chinese retaliation, Trump responded by raising tariffs on $550 billion worth of Chinese goods. He lifted existing tariffsto 30% from 25% on $250 billion of Chinese imports effective Oct 1. Moreover, tariffs planned on a further $300 billion in Chinese goods will be revised to 15% from 10% in two stages — Sep 1 and Dec 15.

A slowdown in global economic growth is being observed with Trump making rampant attacks to defend his America First agenda. Japan has seen a decline in export levels with July marking the eighth month of decrease. Meanwhile, the U.K. economy disappointed in the second quarter for the first time since late 2012, with GDP declining 0.2%. Adding to the disappointment, Germany’s industrial production witnessed the steepest annual slump in nine years.

Per London-based World Economics Ltd, Chinese business conditions as reported by sales managers have touched the lowest point in more than six years. Contracting profit margins, low business confidence and slowing growth of markets and sales are making the situation worse.

Is the Picture All Dull?

Per Standard Chartered Plc economists, China’s index of small businesses rose to 54.5 in August from 53.8 in July. The country witnessed strength in domestic demand largely backed by the administration’s pro-growth measures.

China’s Attempt to Lift Economy

Beijing recently rolled out a key rate reform to lower funding costs for firms in order to lend support to China’s struggling economy. As a result of the new policy, banks must fix rates on new loans by mainly referring to the Loan Prime Rate (LPR) and use LPR as the benchmark for setting floating lending rates (read: Global Stimulus & Huawei Relief Boost Markets: ETFs in Focus).

Chinese administration is also expected to relax or remove restrictions on automobile purchases in order to accelerate domestic consumption. Its State Council has urged local governments across 23 provinces to consider the same and promote purchases of new energy vehicles.

ETF’s 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 Invesco Golden Dragon China ETF PGJ.

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 $4.18 billion and expense ratio is 0.74%. The fund has gained 0.1% year to date (read: Will China ETFs Survive the Moving Out of US Firms?).

MCHI

This fund tracks the MSCI China Index. It comprises 462 holdings. The fund’s AUM is $3.53 billion and expense ratio is 0.59%. It has returned 6.9% year to date (read: Fed & Trade Trigger Market Bloodbath: 6 Hot Inverse ETF Areas).

ASHR

This fund tracks the CSI 300 Index. It comprises 310 holdings. The fund’s AUM is $1.35 billion and expense ratio is 0.66%. The fund has returned 24.3% year to date.

PGJ

This fund follows the NASDAQ Golden Dragon China Index, which offers exposure to the U.S. exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. It holds a basket of 68 stocks. The product has AUM of $179.4 million and charges 70 bps in annual fees. The fund has returned 15.5% year to date (read: Dump Slowdown Fear, Bet on These China ETFs).