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What Led China ETFs to Outperform in Q1 2017?

Sanghamitra Saha

The start of 2017 was dominated by developing economies. If the entire bloc saw the best start to a year since 2012, its largest economy – China – has experienced the best start to a year since 2006. The country’s stocks have buoyed up on good news flowing from the economy.

The largest financial ETF iShares China Large-Cap FXI is up 11.8% this year (as of March 30, 2017) against theS&P 500-based ETF SPY’s 5.7% returns.Let’s delve a little deeper and find out the reasons of the outperformance.

Trump’s Softer Tone Toward Protectionist Views            

Investors should note that China stocks fell into the questionable spot after Donald Trump’s win. This is because Trump is expected to take stricter steps on outsourcing, which China hugely depends on outsourcing.

However, the Trump administration’s tone turned softer lately on several key protectionist issues. Investors thus do not expect too many threats on the outsourcing issue and the Chinese economy as a whole (read: Trump Trade Advisor's Comments Boost Mexico ETFs).

If this was not enough, Trump’s conformity to the "One China" policy on Taiwan, and overall assuring global economic data aided the China investing. One China includes the U.S. government’s recognition that the island of Taiwan is actually part of mainland China (read: What is Driving Asian ETFs Higher?).

Economic Turnaround

The tumultuous 2016 ended decently for the Chinese economy on higher consumer spending. China's GDP expanded 6.8% year over year in Q4, surpassing expectations of 6.7%. It was the highest clip of expansion since the fourth quarter of 2015.

The all-important manufacturing sector picked up momentum lately having expanded for last few months. The country's official March manufacturing Purchasing Managers' Index (PMI) increased to 51.8 in March, compared to February's 51.6. This gives cues of stabilization in the economy (read: 2017 Brings Luck for China ETFs: Will the Rally Last?).

Hike in Borrowing Costs Point to a Steady Economy

In mid-March, China’s central bank hiked borrowing costs, again hinting at a stable economy. Stabilization in the economy, rise in inflation, decline in real lending costs and a boom in the housing market prompted the central bank to tightening the policy. This in turn would benefit the country’s financial sector.

Bullish Sentiments

China’s bankers and corporate leaders appear as confident as they were in 2014, as per a central bank survey. An indicator of bankers’ confidence in the economy grew to 64.9 in the first three months of this year to touch the three-year best level. Confidence among entrepreneurs also jumped to 61.5, reflecting a two-and-a-half year high.

Momentum Plays

Below we highlight a few China ETFs that have outperformed the U.S. as well as emerging market equities ETFs so far this year. Notably, the broader emerging market ETF EEM has advanced 13.3% and the S&P 500-based ETF SPY has added 5.7% in the year-to-date frame (as of March 30, 2017) (see all Asia-Pacific (Emerging) ETFs here).

KraneShares CSI China Internet ETF KWEB – Up 21.9%

Global X China Materials ETF CHIM – Up 20.9%

Global X China Industrials ETF CHII – Up 20.4%

Guggenheim China Real Estate ETF TAO – Up 20%

Guggenheim China Technology ETF CQQQ – Up 19.4%

Global X China Consumer ETF CHIQ – Up 19.3%

Can the Rally Last?

With stellar gains recorded in Q1, several analysts now expect Q2 to be lukewarm for China equities and ETFs. Tightening of monetary policy and liquidity as well as chances of further yuan depreciation in the wake of U.S. rate hikes compelled analysts to think on these lines.

Want to know more about China investing? Check out our recent podcast below for additional information:

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
GUGG-CHINA TEC (CQQQ): ETF Research Reports
GUGG-CHINA RE (TAO): ETF Research Reports
GLBL-X CHIN MAT (CHIM): ETF Research Reports
GLBL-X CHIN IND (CHII): ETF Research Reports
GLBL-X CHIN CON (CHIQ): ETF Research Reports
KRANS-C CHN INT (KWEB): ETF Research Reports
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