ETFs In Focus On China Rate Cut

On Jan 4, People’s Bank of China (PBOC), cut the reserve requirement ratio (RRR) by 100 bps or 1 percentage point to reignite growth in the world’s second-largest economy. The cut in bank’s RRR is the first in 2019 and the size of the cut was more than market expectations. Presently, the RRR for large banks is 14.5% and 12.5% for smaller banks.

The reduction will be made in two equal stages, effective from Jan 15 and Jan 25. About $116 billion worth of liquidity will be added in the market, said the PBOC. The net funds released would be the biggest amount in the five cuts enacted since January 2018.

Per PBOC, implementing the cut in two phases ensures that overall banking liquidity stays reasonable and sufficient while balancing internal and external factors to keep the yuan's exchange rate reasonable and at an equilibrium.

Per Yang Hao, an analyst at Nanjing Securities, the speedy RRR cut shows the determination of policy makers to stabilize growth. He added, Beijing is currently facing a significant downward pressure amid internal and external issues.

In December 2018, Beijing’s manufacturing activity fell into a contraction phase for the first time in two years. Domestic economic slowdown and the uncertainty surrounding the tariff war primarily resulted in the shrinkage in manufacturing activity (read: China's Manufacturing Activity Contracts: ETFs in Focus).

Per Li Keqiang, Premier of the State Council, PBOC, the rate cut is aimed at supporting small and private companies. China will also step up “counter-cyclical adjustments” of macro policies and further cut taxes and fees to cope with economic challenges.

Despite the stream of weak economic data, China’s government has maintained that 2018 economic growth will remain around the 6.5% target-- weakest since 1990. Beijing’s economy expanded at 6.9% in 2017.

What Lies Ahead?

Further cuts in the RRR could be expected this year, especially after a stream of weak economic data in recent months. Analysts believe that Beijing would need to have a steady stream of stimulus measures to ensure a sustainable economic turnaround. Further, economists believe that China’s government could step up fiscal measures as well as boost infrastructure spending (see: all the Asia-Pacific (Emerging) ETFs here).

Washington and Beijing have been holding trade talks for the last two days and it got extended for an unscheduled third day. This might be a great opportunity for taking necessary steps to end or at least de-escalate the trade war before the Mar 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

Against this backdrop, we highlight the Chinese ETFs that hve been performing well over the past one week in anticipation of trade talks (as of Jan 7). Below we highlight them in detail:

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 $5.6 billion and expense ratio is 0.74%. It has returned 1% over the past one week. 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. Its AUM is $3.6 billion and expense ratio is 0.59%. It has returned 1.8% over the past one week. 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 $1.6 billion and expense ratio is 0.70%. It has returned 4.8% over the past one week. The fund has a Zacks ETF Rank #3 with a High 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 returned 2.2% over the past one week. The fund has a Zacks ETF Rank #3 with a High risk outlook (read: Risk-On Trade is Back: ETFs That Gained the Most).

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 $856.5 million and expense ratio is 0.59%. It has returned 1.6% over the past one week. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.

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