China's Manufacturing Activity Contracts: ETFs In Focus

In December 2018, one of the key economic pillars of Beijing fell into contraction phase for the first time in two years. Per Chinese National Bureau of Statistics (NBS), official manufacturing purchasing managers' index (PMI) was 49.4—lower than 49.9 expected in a Reuters poll. Domestic economic slowdown and the uncertainty surrounding the tariff war primarily resulted in the shrink in manufacturing activity. The December reading happens to be weakest since February 2016.

There is a sequential slowdown in factory activity as manufacturing activity stalled in November. The Manufacturing PMI for November fell to 50.0 from 50.2 in October last year, which was the weakest reading since July 2016. (read: China's Manufacturing Stalls in November: ETFs in Focus).

Per Iris Pang, Greater China economist from ING Wholesale banking, slowdown in economic activity in December is slightly unusual going by historical trends. She said that the slowdown in domestic orders was unusual.

In December, new orders, which include both domestic and export, fell below the 50 point level for the first time in 2018, reflecting serious problems on the economic front, per Pang. Also, new exports contracted for the seventh straight month, falling to 46.6—the lowest level since November 2015.

The data from the world’s largest economy is being closely tracked to assess the effects of the U.S. - Sino trade war. Also, the oil markets are being affected by the slowdown in Chinese economy. Globally, China is the biggest importer of oil.

Non Manufacturing PMI Provides Relief

The decline in manufacturing PMI was partly offset by non-manufacturing firms, mostly service sector companies. China's official non-manufacturing PMI came in at 53.8, which was higher than a reading of 53.4 in November.

The non-manufacturing sector in China accounts for a significant chunk of the total economic output. Therefore, this index’s reading holds much more importance than manufacturing PMI. Per Nomura economists, the sequential expansion in December points to rebalancing in the Chinese economy toward more consumption.

However, the official composite PMI was at its lowest level in December since NBS started reporting it in January 2017. The official composite PMI, which measures sentiment among Chinese manufacturing and service sector firms, fell to 52.6 in December from 52.8 in November.

What Lies Ahead?

In a December meet of Central Economic Work Conference, top officials agreed on a number of progressive steps to boost the economy. Among them were additional tax cuts and infrastructure spending.

Also, the government in China needs to take necessary steps to end or at least de-escalate the trade war before the March 1 deadline. In the G-20 summit conducted on Nov 30 and Dec 1, President Trump and Xi Jinping agreed to a 90-day truce according to which the Trump administration will not be hiking tariffs to 25% from 10% on $200 billion worth of Chinese goods for another 90 days. The rates were supposed to be hiked on Jan 1, 2019 (read: Trump-Jingping Truce to Boost These ETFs).

ETFs in Focus

There are reports that Washington and Beijing will start negotiations in early January. So, Chinese ETFs, which performed poorly in the past four weeks (as of Dec 31), are in for a volatile ride going ahead. While developments in trade talks could lead to an upward trend, the slowdown, attributable to domestic factors, could propel investors to look beyond these ETFs. Below we highlight them in detail (see: all the Asia-Pacific (Emerging) ETFs here):

iShares China Large-Cap ETF (TE:FXI)

The fund tracks the FTSE China 25 Index, which tracks the performance of the largest companies in the Chinese equity market. It comprises 50 holdings. The fund’s AUM is $5.7 billion and expense ratio is 0.74%. It has lost 7.4% over the past four weeks. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 10 Most-Heavily Traded ETFs of 2018).

iShares MSCI China ETF MCHI

The fund tracks the MSCI China Index and comprises 302 holdings. The fund’s AUM is $3.6 billion and expense ratio is 0.59%. It has lost 9.2% over the past four weeks. The fund has a Zacks ETF Rank #3 with a Medium risk outlook

KraneShares CSI China Internet ETF KWEB

The fund tracks the CSI China Overseas Internet Index, which includes publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors. It comprises 44 holdings. The fund’s AUM is $1.5 billion and expense ratio is 0.70%. It has lost 13.6% over the past four weeks. The fund has a Zacks ETF Rank #3 with a High risk outlook

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

The fund tracks the S&P China BMI Index and comprises 641 holdings. It has AUM of $900 million and expense ratio is 0.59%. It has lost 7.4% over the past four weeks. The fund has a Zacks ETF Rank #3 with a Medium risk outlook

Xtrackers Harvest CSI 300 China A-Shares Fund ASHR

The fund tracks the CSI 300 Index, reflecting price fluctuation and performance of the China A-share market. It comprises 360 holdings. The fund’s AUM is $1.1 billion and expense ratio is 0.59%. It has lost 9.4% over the past four weeks. The fund has a Zacks ETF Rank #3 with a High risk outlook

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