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ETFs in Focus as China's GDP Nears 30-Year Low Level

Sweta Jaiswal, FRM

China’s economic growth data has disappointed investors again. The world’s second-largest economy’s third-quarter GDP growth of 6% year over year marked the slowest pace after first-quarter 1992. The economic growth rate also lagged expectations of 6.1%, per a Reuters’ poll. The metric compares unfavourably with second quarter’s 6.2% growth and coincides with the bottom end of the Chinese administration’s target of 6-6.5% for 2019 (read: ETFs in Focus as Tariffs Hit Chinese Exports).

What’s Causing the Disappointment?

Trade war tensions with the United States have been quite damaging for China’s  economy. Notably, China’s exports to the United States fell 10.7% year over year in September in dollar terms in January-September 2019. Moreover, Chinese imports from the United States contracted 26.4% year over year. Also, China’s trade surplus with the United States was $25.88 billion in September against $26.96 billion in August.

Overall, China’s export data for September lagged analysts’ expectations. Chinese exports fell 3.2% year over year in September in comparison to analysts’ expectations of a decline of 3%, per a Reuters poll.  Waning demand due to slowing global economic growth, trade war tensions and ‘front-loading’ impact might have caused the drop in export levels. Meanwhile, China’s import levels in September declined 8.5% year over year in comparison to analysts’ expectations of a 5.2% drop.  (read: Time to Buy Global Low-Volatility ETFs?).

Weakening domestic and global markets have led to sluggishness in some major components of the economy like freight shipments, factory power generation, employment and entertainment spending. In fact, factory gate prices had declined the fastest in three years.

Declining investment levels can also be blamed for the disappointment. The country’s fixed-asset investments rose 5.4% from January-September, in comparison to 5.5% in the first eight months. Moreover, the private sector fixed-asset investment was also disappointing, slowing from 4.9% in January-August to 4.7% in the first nine months.

Is There a Silver Lining?

China’s industrial output has grown 5.8% in September, beating analysts’ expectations of 5%. Moreover, a rise in domestic demand drove industrial output, which saw new domestic orders in food processing, textiles and electrical machinery.

There was a 7.8% year-over-year rise in retail sales for September, in line with forecasts. The metric also compared favorably with August’s retail sales growth of 7.5%.

An increase in new construction activity also led to strength in China’s property investment in September. However, there was a slowdown in property transactions.

ETFs in Focus

Against this backdrop, investors can keep a tab on a few China ETFs like iShares China Large-Cap ETF FXI, iShares MSCI China ETF MCHI, Xtrackers Harvest CSI 300 China A-Shares ETF ASHR and Invesco Golden Dragon China ETF PGJ.

FXI

This fund seeks long-term growth by tracking the investment returns, before fees and expenses, of the FTSE China 50 Index. It comprises 50 holdings. The fund’s AUM is $4.46 billion and expense ratio is 0.74% (read: ETFs in Focus as China's Economic Slowdown Persists).

MCHI

This fund tracks the MSCI China Index. It comprises 463 holdings. The fund’s AUM is $3.84 billion and expense ratio is 0.59% (read: ETF Winners as Sino-US Trade War Tensions Ebb).

ASHR

This fund tracks the CSI 300 Index. It comprises 301 holdings. The fund’s AUM is $1.72 billion and expense ratio is 0.65% (read: Should You Buy China ETFs Now?).

PGJ

This fund follows the NASDAQ Golden Dragon China Index, which offers exposure to the U.S. exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. It holds a basket of 66 stocks. The product has AUM of $179.8 million and charges 70 bps in annual fees (read: Dump Slowdown Fear, Bet on These China ETFs).

Looking Forward

The trade war made quite an impact on China’s economy as is evident from falling export and imports levels, decreasing jobs, declining business and consumer confidence, and shrinking investments. In this regard, Shanghai-based economist at Hwabao Trust, Nie Wen has said “given exports are unlikely to stage a comeback and a possible slowdown in the property sector, the downward pressure on China’s economy is likely to continue, with fourth-quarter economic growth expected to slip to 5.9%.”