China's Inflation Exceeds Expectations: ETFs In Focus

Consumer Prices

China’s consumer price index (CPI) increased 1.8% year over year in August compared with 1.4% in July, a seven-month high, per data released by National Bureau of Statistics. It surpassed economists’ expectations of a 1.6% gain.

Although this is a good sign for the economy, it is still below the inflation target of 3%. Core consumer price inflation, which excludes price impact of food and energy, increased 2.2% year over year in August compared with a 2.1% in July.

Food prices decreased 0.2% year over year. However, it increased 1.2% on a monthly basis, driving the August inflation reading higher.

Producer Prices

China’s producer price index increased 6.3% year over year in August compared with 5.5% in July, a four-month high. It surpassed economists’ expectations of a 5.7% gain.

The increase in producer prices was driven by an increase in prices for coal, steel and other metals. Demand for steel rose owing to an increase in building activities. Economists are expecting China’s impressive reading of producer price inflation to provide momentum to the economy and also act as a catalyst to global growth, as commodity demand from the country increases.

Economic Growth

China’s GDP has been growing at a rapid pace. It increased 6.9% year over year in the second quarter of 2017, same as the first quarter. China reported a strong first half of 2017 but data released for July showed signs of fading GDP (read: China Q2 GDP Beats Expectations: ETFs in Focus).

The slowdown was widely expected. This can primarily be attributed to fears of a potential financial crisis owing to the looming debt problem faced by the country. The debt scenario in the world’s second-largest nation prompted the government to adopt a tightening monetary-policy stance in order to rein in debt (read: China's Inflation, Debt & Impact on Australia: ETFs in Focus).

Although the inflation reading is a positive for the economy, economists do not expect China to change its stance on monetary policy yet.

Geopolitical Risks

The Chinese economy is also subject to the prevailing geopolitical risks. North Korea conducted its sixth nuclear test, that of a hydrogen bomb, which can be mounted on an Inter Continental Ballistic Missile, on Sep 3, 2017. Kim Jong-Un’s actions have created huge unrest in a number of Asian economies and the United States (read: Safe Haven Currency ETFs Gain, Dollar Loses Amid Geopolitical Uncertainty).

The North Korean economy is heavily dependent on trade with China. Although U.N. passed fresh sanctions on North Korea on Sep 11, 2017, these were a lot less harsh than what US ambassador to the U.N. Nikki Haley had initially planned. Sanctions were watered down in order to secure China and Russia’s support, as they held veto power on the decision.

Let us now discuss a few ETFs focused on providing exposure to the Chinese economy (see all Asia-Pacific Emerging ETFs here).

iShares China Large-Cap ETF (ST:FXI)

This fund seeks to provide exposure to Chinese equities, serving as a pure play on the economy.

It has AUM of $3.48 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 Telecommunication Services are the top three allocations of the fund, with 52.97%, 11.15% and 10.03% exposure, respectively (as of Sep 8, 2017). From an individual holding perspective, Tencent Holdings Ltd, China Construction Bank Corp and Industrial and Commercial Bank of China are the top three allocations of the fund, with 9.73%, 8.74% and 7.38% exposure, respectively (as of Sep 8, 2017). The fund has returned 26.74% year to date and 16.38% in a year (as of Sep 11, 2017). FXI currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares MSCI China ETF MCHI

This ETF is another such option to play the BRIC nation.

It has AUM of $2.54 billion and charges a fee of 64 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 39.26%, 23.15% and 9.76% exposure, respectively (as of Sep 8, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba (NYSE:BABA) Group Holding ADR and China Construction Bank Corp are the top three allocations of the fund, with 15.97%, 13.12% and 4.94% exposure, respectively (as of Sep 8, 2017). The fund has returned 42.20% year to date and 29.94% in a year (as of Sep 11, 2017). MCHI currently has a Zacks ETF Rank #3 with a Medium risk outlook (read: Here's Why China Tech ETFs Are Surging).

SPDR S&P China (MX:GXC) ETF GXC

This fund has AUM of $1.01 billion and charges a fee of 59 basis points a year. From a sector look, Information Technology, Financials and Consumer Discretionary are the top three allocations of the fund, with 34.27%, 22.22% and 10.95% exposure, respectively (as of Sep 8, 2017). From an individual holding perspective, Tencent Holdings Ltd, Alibaba Group Holding ADR and China Construction Bank Corporation are the top three allocations of the fund, with 12.81%, 10.98%, and 4.71% exposure, respectively (as of Sep 8, 2017). The fund has returned 39.17% year to date and 28.73% in a year (as of Sep 11, 2017). GXC currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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