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Will the Year of Pig Shower Fortunes on China ETFs?

Sanghamitra Saha

Over the years, China’s economy has turned out extremely crucial in gauging global economic and investing 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 economy’s growth slows down, which actually has been the case of late, the global economy will have reasons to worry.  

Against this backdrop, China is stepping into its Lunar New Year 2019 – the Year of the Pig – today. Let’s find out what’s in store for China ETFs this New Year.

Recap of the Dog Year

The year went all wrong for China investing due to year-long trade tensions with the United States. It started in March after Trump ordered duties on steel and aluminum imports followed by an announcement to levy up to $60 billion of import duties on Chinese goods.

The whole year was spent on negotiations with no concrete solution in sight.To date, the United States has slapped tariffs of 10% on $250 billion worth of Chinese products, and has warned tariffs on US$267 billion more. Meanwhile, China has set tariffs on $110 billion worth of U.S. goods (read: China's Likely Retaliation to US Tariffs & Its Impact on ETFs).

China’s fourth-quarter gross domestic product (GDP) grew at the weakest clip since the financial crisis of 2009, slipping to 6.4% from 6.5% in Q3. Overall, the economy’s 2018 growth rate of 6.6% was a 28-year low.

Weak investment and wavering consumer confidence weighed on the economy. China’s factory activity contracted last December, for the first time in more than two years(read: China's 2018 GDP Growth 28-Year Low: ETFs That Lost the Most).

iShares China Large-Cap ETF FXI is down 14.3% past year (as of Feb 1, 2019) while Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF ASHS is off more than 30%.

What Lies Ahead in the Year of the Pig?

Looks like the year of the pig, which symbolizes wealth and prosperity, will bring luck for China investing thanks to optimism surrounding trade with the United States. Per the sources, both sides are considering a meeting in Vietnam on Feb 27 and 28, and striving to reach a resolution on trade ties. Both parties may seek to protract trade war truce before the final deal.

China’s central bank cut its reserve requirement ratio (RRR) several times in the past year, to release about $116 billion for new lending and boost the economy. The latest cut in RRR has been in 2019 that has taken RRR to 14.5% for large institutions and 12.5% for smaller banks. The cuts will be put into effect on Jan 15 and Jan 25, respectively.

To boost the economy, China recently launched tax breaks for small businesses run by recent graduates and low-income workers. The cuts take effect from Jan 1 and will continue till 2021-end. The Finance Ministry said this month that it will roll out larger tax and fee cuts, to boost small firms and manufacturers, per Reuters.  

Still, with the trade war and other internal issues in the economy, one analyst predicts China’s economic growth at a tepid 5.3% in the pig year. However, IMF reiterated its 2019 forecast for Chinese GDP at 6.2% and sees robust consumption. In short, the year of the pig will continue to see China moving forward to more self-reliant policies, which will shift its dependence from exports to consumption.

And the investing world has higher chances of outperformance in the New Year. After being beaten down in the dog year, Chinese stocks are now trading at cheaper valuation.

ETFs in Focus

Against this backdrop, we would like to highlight a few China ETFs that have been the steadiest at the start of the New Year. These ETFs are outperformers so far in 2019 (as of Feb 1, 2019).

Invesco Golden Dragon China ETF PGJ – Up 16.7%

KraneShares CSI China Internet ETF KWEB – Up 15.7%

Global X MSCI China Health Care ETF CHIH – Up 15.3%

Global X MSCI China Consumer Discretionary ETF CHIQ – Up 14.6%

Global X MSCI China Information Technology ETF CHIK – Up 13.5%

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iShares China Large-Cap ETF (FXI): ETF Research Reports
 
Invesco Golden Dragon China ETF (PGJ): ETF Research Reports
 
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