China’s manufacturing activity grew faster than expected in June 2017. According to China’s National Bureau of Statistics (NBS), the manufacturing Purchasing Managers Index (PMI) increased to 51.7 in June compared with 51.2 in May and above market estimates of 51, per a Reuters poll.
Moreover, China’s services PMI increased to 54.9 in June compared with 54.5 in May. Improvement in both these measures is indicative of resilience in the economy and the momentum provides some respite considering the looming debt problem faced by the country. Investors should note that PMI readings higher than 50 indicate expansion while below 50 indicate contraction.
Per Bloomberg, new export orders increased to 52, highest in more than five years. The Chinese economy grew 6.9% year over year in the first quarter of 2017 compared with 6.8% in the fourth quarter of 2016.
Recently, MSCI announced its plans of including China’s mainland shares to its benchmark emerging markets index. This prompted a rally in Chinese stocks.
Despite these positives, investors are concerned about the Chinese economy because of the massive debt problem. The debt burden woes prompted Moody’s to downgrade China’s debt rating to A1 from Aa3. Moreover, China’s Consumer confidence decreased to 112 in May 2017 compared with 113.4 in April.
Let us now discuss a few ETFs focused on providing exposure to the Chinese economy.
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 $3.18 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 51.38%, 11.63 % and 10.79% exposure, respectively (as of June 28, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp and China Mobile Ltd are the top three allocations of the fund, with 9.21%, 8.47% and 7.64% exposure, respectively (as of June 29, 2017). The fund has returned 14.65% year to date and 17.72% in the last one year (as of June 29, 2017). FXI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
