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Is It Finally Time for China ETFs?

Since China has been hitting headlines for last one year and playing a key role in driving the global market, investors would naturally be interested in its Q1 GDP numbers.

But there were no surprises for investors as Q1 GDP growth of 6.7% (from a year earlier) matched the Reuters poll. However, the expansion rate has slipped from 6.8% recorded last quarter to be the lowest since the heightened financial crisis in the first quarter of 2009, per financial times.

Since the Chinese economy flared up the global market conundrum with its hard landing fears, investors can take the in-line         GDP reading as the beginning of improvement. This is truer given a volley of economic data released lately that came in at stronger side. Most importantly, the Chinese manufacturing sector expanded in March after eight months of contraction.

Inside Recovering data Points

The country’s official manufacturing Purchasing Managers' Index (PMI) came in at 50.2 in March, which beat Reuters estimate of 49.3 and February’s reading of 49 (read: Global Manufacturing Picks Up: ETFs to Watch).

Yes, the private Caixin manufacturing PMI tells us a different story. As per this index, the reading increased to 49.7 in March from 48.0 in February. Though the data was below 50 and indicated another month of contraction, it was the highest since March 2015. The momentum was also seen in the service sector. China’s official non-manufacturing PMI grew to 53.8 in March from 52.7 in February.

China’s property market is simply booming with housing sales surging 54.1% in Q1 backed by favorable mortgage policies. Other economic indicators like auto sales also looked up lately. Producer prices grew 0.5% in March over February, representing the first sequential rise since 2013. This is not all. China’s foreign exchange reserves increased $10.3 billion to $3.21 trillion in March, representing the first monthly expansion in five months.

Steps are also to be taken to allay limits (levied earlier) on brokerages to give a boost to the stock market. China’s GDP growth had slowed to a 25-year low in 2015; still its stock market ballooned due to some practices like margin lending. This is why China left no stone unturned to shore up its market and the economy and rolled out several initiatives, some of which are finally bearing fruit.

IMF Upgrade

If these were not enough to calm edgy investors’ nerves, IMF’s recent upgrade should do the trick. This month, IMF upped its forecast for China's economic growth in the near term, though the organization cut the global growth outlook.

The IMF now sees the Chinese economy growing by 6.5% in 2016 and 6.2% in 2017, both up 0.2 percentage points from its prior projection made in January.  A series of policy stimulus and a booming service sector, which made up for manufacturing slowdown, led IMF to raise its forecast on the world’s second largest economy.

Christine Lagarde, the managing director of the IMF, backed China’s economic model which intends to be more domestic consumption oriented rather than export oriented. Lagarde notified that China's lower growth is "deliberate" and sees no hard landing, going forward, as per Chinadaily.

Agreed, there are a number of headwinds still facing the Chinese economy, including shadow-banking activities and credit crunch issues. To top it all, the S&P index slashed the China sovereign credit outlook to negative from stable in late March.

Whatever the case, it seems that the road ahead for the Chinese stocks and ETFs are clear now, at least for the near term. Below we highlight a few ETFs that could be in focus in the coming days (read: China ETF Investing: Will it Buoy up or Dip Down in 2016?).

iShares MSCI China Small-Cap ETF (ECNS)

The fund offers exposure to the performance of stocks in the bottom 14% by market capitalization of the Chinese equity securities markets, as represented by H-Share. The fund is an overlooked choice with just $21.5 million in assets.

This fund charges 64 bps in fees. As much as 70.3% of the stocks hail from China while the rest belong to Hong Kong. The fund is heavy on Consumer Discretionary (22%) followed by IT (17.3%), Financials (17.1%) and Industrials (16.7%). ECNS has low company-specific concentration risks with no stock holding more than 1.60% of the basket.

Global X China Financials ETF (CHIX)

This ETF provides concentrated exposure to the financial segment of Chinese equity market by holding around 40 securities in its basket with the top two firms – China Construction Bank and Industrial & Commercial Bank of China– dominating the fund’s returns at more than 9% share each. The fund has amassed $17.9 million in its asset base. It charges 65 bps in annual fees and expenses (read: Where will China Financial ETFs Go from Here?).

Global X China Consumer ETF (CHIQ)

This product offers exposure to the consumer sector in China. Holding about 40 securities in its basket, it is pretty spread out across each component as none of these holds more than 6.24% share. The fund has a lower level of $86.3 million in AUM. It charges 65 bps in annual fees (read: China Ends One Child Policy: Stocks & ETFs to Watch).

iShares China FTSE 25 Index Fund (FXI)

This is easily the most popular China ETF in the market, as over $4.8 billion is invested in the fund. The 51-stock product puts half of its weight in the financial sector. The fund charges 74 bps in fees.

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ISHARS-MS CH SC (ECNS): ETF Research Reports
GLBL-X CHIN FIN (CHIX): ETF Research Reports
GLBL-X CHIN CON (CHIQ): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
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