China ETFs Could Be Vulnerable Amid Slowing Inflation (FXI)

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January 11, 2018 8:13am NYSE:FXI

Image of a traditional Chinese building

From Zacks: China’s consumer prices increased 1.8% year over year in December compared with 1.7% in November.


However, it came in below Bloomberg expectations of 1.9%, per the National Bureau of Statistics (NBS). It is still way behind China’s target of 3% (read: What Lies Ahead for China ETFs?).

Food prices fell 0.4% year over year compared with a decline of 1.1% in November. Non-food prices grew 2.4% year over year compared with 2.5% in November.

The bureau also added that producer prices increased 4.9% year over year in December compared with 5.8% in November. Also it came in above Bloomberg expectations of a 4.8% increase.

Economic Scenario

China’s National Bureau of Statistics said that the country’s GDP grew 6.8% year over year in the third quarter compared with 6.9% in the second quarter. The Chinese government has been facing challenges of curbing property market speculation and high debt. The government’s crackdowns on financial risks led to a slowdown in economic activity in some parts of the country.

In the Congress meet in late 2017, the policymakers hinted at their shift of agenda toward a crackdown on pollution and financial risks from economic growth at any cost. The slowdown in producer price index is indicative of the industry sentiment. China’s curbs to crack down on pollution have affected energy and pollution-intensive companies and have added to their cost pressures. Moreover, the government’s curb on smog in industrial zones has hit raw material demand.

China, being North Korea’s biggest trade partner, is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea’s actions. North Korean dictator, Kim Jong-un, warned the United States of potential nuclear action in case his country is threatened. “The entire United States is within range of our nuclear weapons, a nuclear button is always on my desk. This is reality, not a threat,” Kim Jong-Un stated in his New Years speech (read: What Does Kim Jong-Un’s Speech Hold For Safe Haven ETFs?).

Let us now discuss a few ETFs focused on providing exposure to the Chinese economy (see all Asia-Pacific Emerging ETFs here).

iShares China Large-Cap ETF (FXI – Free Report)

This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.

It has AUM of $4.2 billion and is a relatively expensive bet as it charges a fee of 74 basis points a year. From a sector look, Financials, Energy and Information Technology are the top three allocations of the fund, with 53.8%, 11.6% and 9.1% exposure, respectively (as of Jan 8, 2018). From an individual holding perspective, China Construction Bank Corp, Tencent Holdings Ltd and Industrial and Commercial Bank of China are the top three allocations of the fund, with 9.4%, 9.1% and 7.5% exposure, respectively (as of Jan 8, 2018). The fund has returned 39.0% in a year. FXI has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares MSCI China ETF (MCHI – Free Report)

This ETF is another such option to play the BRIC nation.

It has AUM of $3.1 billion and charges a fee of 62 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 41.8%, 22.1% and 9.3% exposure, respectively (as of Jan 8, 2018). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corp are the top three allocations of the fund, with 18.6%, 12.8% and 4.8% exposure, respectively (as of Jan 8, 2018). The fund has returned 58.6% in a year. MCHI has a Zacks ETF Rank #3 with a Medium risk outlook.

SPDR S&P China ETF (GXC – Free Report)

This fund has AUM of $1.2 billion and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 37.0%, 22.0% and 10.5% exposure, respectively (as of Jan 8, 2018). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top three allocations of the fund, with 15.5%, 11.1%, and 5.3% exposure, respectively (as of Jan 8, 2018). The fund has returned 56.3% in a year. GXC has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

The iShares FTSE/Xinhua China 25 Index ETF (FXI) rose $0.03 (+0.06%) in premarket trading Thursday. Year-to-date, FXI has gained 5.31%, versus a 2.72% rise in the benchmark S&P 500 index during the same period.

FXI currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 36 ETFs in the China Equities ETFs category.


This article is brought to you courtesy of Zacks Research.


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