What Lies Ahead For These China ETFs?

china etfsWhile the global market heaved a sigh of relief last week with the U.S. risks temporarily averted, China has become a flashpoint where events could either promote global stability or push other markets into a crisis.

Fears of a cash crunch have surfaced once again in the world’s second largest economy as the central bank did not inject liquidity into the economy for the third day in a row. This has resulted in rising money market rates across the nation.

The seven-day bond repurchase rate, a key gauge of short-term liquidity in China, jumped more than 150 bps in the past two days to nearly 5% after seeing a persistent decline since October 9th. This marks the biggest increase since July and signals that the bank might start tightening its monetary policy in order to prevent rising property prices and growing inflation.

The latest housing data in China suggests that home prices in some major cities have climbed sharply and is a bit out of control, leading to heightened worries over a property bubble. This could aggravate the inflation rate, which is already at a seven-month high (read: Focus on These China ETFs for Outperformance).

Market Impact

The sudden move by the People’s Bank of China to suspend weekly auctions of reverse repurchase agreements had caused jitters across the global markets. The bank generally conducts bi-weekly reverse-repurchase operations on Tuesday and Thursday to provide liquidity to the market.

As such, China ETFs saw horrendous trading yesterday, crushing stocks across the board. Below, we have highlighted three most popular ETFs that have seen rough trading and might continue to do so in the coming days.

iShares FTSE China 25 Index Fund (NYSEARCA:FXI)

This fund provides exposure to a small basket of 26 Chinese large cap stocks by tracking the FTSE China 25 Index. The product has over $5.7 billion in AUM and is extremely liquid, trading in volumes of more than 18 million shares a day. FXI charges 74 bps in fees per year from investors.

The ETF is largely concentrated on its top 10 holdings with nearly 60% of total assets going to these companies. In terms of sector holdings, financials dominate the fund with more than 55% share while telecom, oil & gas, and technology provide a decent mix in the portfolio. The fund lost 3.33% yesterday and holds a Zacks ETF Rank of 3 or ‘Hold’ rating.

iShares MSCI China Index Fund (NYSEARCA:MCHI)

This large cap focused ETF follows the MSCI China Index, holding 138 securities in its basket. The fund has amassed over $1 billion in its asset base while charging 61 bps in annual fees. Volume is also good as it exchanges roughly 550,000 shares on average for a day.

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