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What Lies in China ETFs' Fortunes in the Year of Rat?

Sanghamitra Saha

China’s economy has over the years become a key gauge of the global economic and investment health. China’s $13 trillion economy, second in size just after the United States, makes up about a third of global growth each year. So, if China’s debt-ridden and trade-war-stricken economy’s growth slows down, which actually has been the case of late, the global economy will have to pay the price for it, in some way or the other.

Against this backdrop, China is stepping into its Lunar New Year 2020 — the Year of the Rat — on Jan 25. Let’s find out what’s in store for China ETFs this New Year.

Recap of the Pig Year

The year brought ups and downs for China investing due to ebb and flow in trade tensions with the United States. While the first quarter went smoothly for Chinese equities thanks to the improvement in U.S.-China trade relation, things became worse in mid-2019.

Basically, the most part of 2019 was spent on negotiations and the intensification of the tariff war while the real improvement came in the final quarter with the announcement of the phase-one trade deal. Stocks started rallying from the fourth quarter of 2019.

China’s fourth-quarter gross domestic product (GDP) grew at 6%, unchanged from the Q3 figure. This matched the lowest quarterly growth on record. Overall, the economy’s 2019 growth rate of 6.1% was a 29-year low, below market expectation of 6.2%.

Lackluster industrial production and wavering consumer confidence weighed on the economy. Retail sales, a key indicator of consumer spending in the world’s most-populated nation, grew 8.0% in 2019, down from 9% in 2018.

Monetary policies have been primarily easy. The People’s Bank of China slashed a key interbank interest rate on Nov 18, marking the first such easing since 2015. This apart, China’s central bank announced several cuts in reserve requirement ratios (RRRs) in 2019 to release billions of yuan for some small and medium-sized banks.

iShares China Large-Cap ETF FXI has gained 7.5% in the past year (as of Jan 21, 2019) while Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF ASHS is up more than 25%. VanEck Vectors ChinaAMC SME-ChiNext ETF CNXT has jumped 48.9%. So, as they say, the year of the pig symbolizes wealth and prosperity, China ETFs finally did well in 2019 on an overall basis, way better than 2018 — the Year of the Dog.

What Lies Ahead in the Year of the Metal Rat?

Though the year could start on a wobbly note due to the outbreak of coronavirus, things could smoothen out as the year progresses. The spread of Coronavirus can hurt the travel industry and retail sales in the busy period of the lunar new year. But then, analysts are hopeful that the crisis will be contained soon.

Coming to the economy, Beijing is beefing up fiscal stimulus with the state planner recently approving eight fixed-asset investment projects in November worth of a combined 7.1 billion yuan. The move was to fight the pressure building from sluggish domestic demand. Meanwhile, a survey indicated continued improvement in China’s manufacturing sector.

CLSA Limited’s (CLSA), Feng Shui Index (FSI) predicts a rally in the property and resources in the rat year. With trade tensions subsiding slightly, China may see an uptick in industrial production, which in turn would boost demand for resources like copper and steel. On the other hand, low rates should benefit property stocks.

Major index providers are raising the weights of China A-shares in their global benchmarks, which will lead to inflows of billions of dollars into those stocks. The IMF recently upgraded China's 2020 growth forecast by 0.2 percentage point to 6.0% to reflect partial tariff reduction by the United States.

Against this backdrop, we would like to highlight a few China ETFs that have been the steadiest ahead of the New Year. These funds easily beat the S&P 500 ETF SPY (up 2.7%) (read: After a Solid 2019, 5 China ETFs to Keep Rallying in 2020).

Global X MSCI China Information Technology ETF CHIK – Up 11.9% in the past 10 days (as of Jan 22, 2020)

KraneShares MSCI All China Health Care Index ETF KURE – Up 8.6%

KraneShares MSCI China Environment ETF KGRN – Up 7.3%

VanEck Vectors ChinaAMC SME-ChiNext ETF CNXT – Up 5.1%

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