Inside The Struggling China A-Shares ETFs

china etfsThanks to the advent of ETFs, there are plenty of options available for investors to buy up shares in the Chinese market. Easily the most popular is the iShares FTSE China Large Cap ETF (NYSEARCA:FXI) which has over $5 billion in assets under management.

Even though this is the most accepted way to gain exposure to Chinese stocks, a new type of Chinese ETF investment has burst onto the scene lately; the China A-Shares ETF.

These types of shares trade in Shanghai and Shenzhen that are currently closed off to many Western investors. Only Qualified Foreign Institutional Investors and Renminbi Qualified Foreign Institutional Investors have access to these shares.

However, global investors can access these markets via the Market Vectors China ETF (NYSEARCA:PEK), PowerShares China A-Share Portfolio (NYSEARCA:CHNA) and the newly launched db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEARCA:ASHR).

Tumbling China A-Shares ETFs

The lackluster economic scenario in China has not only crushed the popular ETFs, but China A-Shares ETFs have also not been spared. While both PEK and CHNA have tumbled more than 10% in the last one month, ASHR has fallen in the high single digits.

A deeper look at the index tracked by these funds reveal the reason for the fall. Both ASHR and PEK track the CSI 300 Index. The index’s heavy exposure to Financials and Industrials sectors (almost 50% allocation) can be blamed for the poor performance of the above ETFs.

Both these sectors have delivered lackluster performance in 2013. In fact, the China Financials ETF (CHIX) has tumbled 11% in the last one year (read: China ETFs Tumble to Start 2014).

Reasons for the Fall

The world’s second largest economy has lately divulged a series of economic readings, revealing a slowing economy. The high growth rates achieved in yester years on the back of massive debt could now be a thing of the past.

The Purchasing Managers’ Index (PMI) for China in both factory activity and the services sector declined in December, indicating a slowdown in the country’s growth. New business expansion was the slowest in six months.

Moreover, the Chinese economy is expected to report 7.6% growth in 2013, representing the weakest growth rate since 1999. However, some leading analysts predict a figure even below 7%.

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