Will Chinese ETFs feel pressure from weak economic data?


The world’s second-largest economy saw some slowdown in factory activity in January. According to data from the National Bureau of Statistics (NBS), the official Purchasing Managers’ Index (PMI) for the manufacturing sector stood at 50.1 in the first month of 2022, down from 50.3 in December. However, analysts projected the reading at 50. Notably, any reading above 50 indicates expansion. The upsurge in cases of the coronavirus outbreak and increased restrictions affecting production and demand may have impacted the data.

The official PMI sub-index for production came in at 50.9 from 51.4 in December 2021. The new orders index also fell to 49.3 from 49.7 in the last month of 2021.

It should be noted that China has shown a rapid recovery from the pandemic-induced economic downturn last year. However, the real estate market’s debt problems have dampened the recovery momentum. Soaring raw material prices and COVID-related constraints have likely impacted manufacturers, creating pressure on them.

Market experts also attribute the slowing Chinese economic recovery to President Xi Jinping’s efforts to implement structural changes to manage long-term risks and distortions. These changes involve reducing carbon emission levels and cracking down on the real estate industry and major tech players. As a result, the government plans to limit industrial air pollution levels soon before the start of the Beijing Winter Olympics. In this regard, steel mills in the northern regions have been asked to cut production until mid-March, according to a Reuters report.

China’s economy grew 4.0% year-on-year in the fourth quarter of 2021 (the weakest expansion in a year and a half). Additionally, the International Monetary Fund has lowered its growth projection for China in 2022 to 4.8% from a previously announced 5.6% due to the aforementioned obstacles (according to a Reuters article).

In this regard, Zhang Zhiwei, chief economist at Pinpoint Asset Management, said that “industrial activity has slowed down due to weak domestic demand. The service sector is also affected by epidemics in many cities. The weak PMI indicates that the government’s policy easing measures have yet to trickle down to the real economy… We expect the government to step up policy support in the coming months, including through through additional budget spending,” as noted in a Reuters article.

Notably, China’s central bank is providing support by cutting interest rates and introducing more liquidity into the financial system to reduce borrowing costs. These measures come at a time when the real estate crisis in China is expected to continue at least in the first half of 2022 and when uncertainty surrounding the pandemic prevails.

Chinese ETFs that could suffer
In this context, investors can keep an eye on a few China ETFs like iShares MSCI China ETF MCHI, iShares China Large-Cap ETF FXI, Xtrackers Harvest CSI 300 China A-Shares ETF ASHR, SPDR S&P China ETF GXC, iShares MSCI China A ETF CNYA and Invesco Golden Dragon China ETF PGJ.

MCHI
This fund tracks the MSCI China Index. It includes 627 farms. The fund’s assets under management are $6.25 billion and the expense ratio is 0.57%.

FXI
This fund seeks long-term growth by replicating the investment returns, before fees and expenses, of the FTSE China 50 Index. It comprises 51 farms. The fund’s assets under management are $5.83 billion and the expense ratio is 0.74% (read: best performing foreign broad ETFs of 2021).

ASHR
This fund follows the CSI 300 index. It includes 313 farms. The fund’s assets under management are $3.22 billion and the expense ratio is 0.65%.

GXC
The fund seeks to provide investment results which, before fees and expenses, generally correspond to the total return performance of the S&P China BMI Index. It includes 884 farms. The fund’s assets under management are $1.48 billion and the expense ratio is 0.59% (read: Alibaba tumbles on low earnings report: ETF in brief).

CNYA
The fund tracks the MSCI China A Inclusion Index. It includes 491 farms. The fund’s assets under management are $921.1 million and the expense ratio is 0.60%.

PGJ
This fund tracks the NASDAQ Golden Dragon China Index, which provides exposure to publicly traded US companies headquartered or incorporated in the People’s Republic of China. He holds a basket of 95 shares. The product has an AUM of $198.6 million and charges 69 basis points in annual fees.
Source: Zacks

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