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ETFs in Focus as China's Economic Slowdown Persists

Sweta Jaiswal, FRM

China’s data for August have disappointed investors once again. The world’s second-largest economy continues to grapple with weakening domestic demand and tough external conditions. From investment gauges, retail sales to industrial output growth, the weakness was widespread. In fact, industrial output growth in August had been the slowest in 17 and a half years (read: ETFs in Focus as Trade War Takes a Toll on Chinese Exports).

Following the release of data, weakness was observed in China’s blue-chip CSI300 index that fell 0.4% on Sep 16. Moreover, the Shanghai Composite Index declined 0.02% on the same day. MSCI's Asia ex-Japan stock index was also down 0.33%.

More on the Numbers

China witnessed a 4.4% year-over-year rise in industrial production in August in comparison with 4.8% growth in July. It also compares unfavorably with Reuters analysts’ forecast of around 5.2% growth. Retail sales growth of 7.5% was also disappointing as against 7.6% in July (read: China ETFs Surge: Will the Upside Continue?).

Factors Behind the Disappointment

The ongoing U.S.-China trade tensions  have been affecting China’s economy. Notably, China’s exports to the United States fell 16% year over year in August compared with a decline of 6.5% in July. Moreover, Chinese imports from the United States contracted 22.4% year over year. Also, China’s trade surplus with the United States came in at $26.95 billion in August  against $27.97 billion in July. In fact, China witnessed the first monthly weakness since around a couple of years in the value of delivered industrial exports which dropped 4.3% year over year in August.

Various investment gauges have also been disappointing. China’s fixed asset investment for January-August 2019 grew 5.5% year over year in comparison to 5.7% growth in the first seven months of 2019. The metric also lagged analysts’ expectations of 5.6% growth. It is worth noting here that investment growth in the mining and the manufacturing sectors was disappointing in the January-August period.

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 in markets and sales are aggravating the situation. Per a Reuters article, producer prices have been observed to decline at the fastest pace in three years. Also, a factor survey revealed a decline in activities for the fourth consecutive month. 

China has again witnessed a decline in car sales of 6.9% in August. This was the 14th consecutive monthly fall. Moreover, China’s anti-pollution campaigns to curb carbon emissions to meet climate targets are impeding industrial output growth.

Corn, one of the three major crops in China, accounted for 7.8% of China’s GDP in 2018. However, the corn industry in China is being adversely impacted by a declining pig population due to the outbreak of the African swine fever. China’s live pig population declined 38.7% year over year by the end of August. It is being estimated that swine flu will eliminate around 23 million tons of corn consumption ( around 10% of domestic production) by lowering pig feed demand in 2019 by 25% (read: ETFs & Stocks in Focus as China Plans to Import Pork).

Data Increases Stimulus Hope

The slew of weak data has strengthened expectations of further stimulus from the Chinese government. It is being speculated that China’s central bank will soon cut the medium-term loan facility rate (MLF) that can lead to lowering of the new loan prime benchmark rate (LPR) as well. However, rising debt risks may limit the extent to which stimulus can be infused in the Chinese economy.

Looking Forward

Market experts don’t see a near-term recovery in China’s economy. The weak August data are making investors apprehensive about September data which will include the impact of higher trade tariffs that went into effect on Sep 1. Moreover, most of the analysts do not see a trade deal in the near term and so they believe China will have to see another round of tariff hikes, which were postponed to Oct 15. China might also face the brunt of rising oil prices because of the latest Saudi Arabia oil site attacks. Saudi Arabia accounts for about 70% of total Chinese demand and is the single largest source of its crude oil imports.

ETFs in Focus

Against this backdrop, investors can keep a tab on a 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 $4.45 billion and expense ratio is 0.74% (read: ETFs in Focus as US Imposes New Tariffs on Structural Steel).

MCHI

This fund tracks the MSCI China Index. It comprises 462 holdings. The fund’s AUM is $3.88 billion and expense ratio is 0.59% (read: ETF Winners as Sino-US Trade War Tensions Ebb).

ASHR

This fund tracks the CSI 300 Index. It comprises 309 holdings. The fund’s AUM is $1.62 billion and expense ratio is 0.66% (read: Should You Buy China ETFs Now?).

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 $191.1 million and charges 70 bps in annual fees (read: Dump Slowdown Fear, Bet on These China ETFs).

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Invesco Golden Dragon China ETF (PGJ): ETF Research Reports
 
Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR): ETF Research Reports
 
iShares MSCI China ETF (MCHI): ETF Research Reports
 
iShares China Large-Cap ETF (FXI): ETF Research Reports
 
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