Disappointing Chinese economic data could lead the authorities to take measures to boost growth much sooner than anticipated, creating a potential opportunity for Chinese equities to rally in the near-term.
Stephen Cohen, Chief Investment Strategist, iShares EMEA.
That’s the view of Stephen Cohen, Chief Investment Strategist (EMEA) at iShares, the world’s largest provider of exchange-traded funds (ETFs).
According to Cohen: “As the Chinese authorities attempt to clamp down on the build-up in debt to move from an investment-led to a consumption-led economy, we expect to see increasing levels of volatility. This month saw China’s first domestic bond market default. With reform in mind, allowing small-sized non-systemic bankruptcies should help instil more market discipline. To that end, Premier Li recently indicated that China was likely to see a series of defaults while ensuring financial stability. The recent slew of February economic data from China, including retail sales, industrial production and fixed asset investment, were below expectations. Together with a trade data miss and softer inflation, this has painted a weaker growth picture.”
He added: “The current growth weakness could lead to the government re-prioritising growth in the short-term in order to limit the speed of the slowdown, as they balance it with reform announcements such as this weekend’s currency band widening. They could act as they did last June after a very similar slowdown, through easing monetary conditions and boosting investment, but potentially earlier. As such, there could soon be an opportunity for Chinese equities to perform in the near-term on the prospect of possible policy action.”
Investors looking to access Chinese equities have a range of ETFs at their disposal. iShares’ sole European product in this space is the iShares China Large Cap UCITS ETF (FXC), which is listed on the London Stock Exchange, Borsa Italiana, Deutsche Börse, NYSE Euronext Amsterdam, NYSE Euronext Paris and SIX Swiss Exchange. The fund, which has more than $800 million in assets, aims to track the performance of the FTSE China 25 Index, a free float market capitalisation weighted index offering exposure to 25 of the largest and most liquid Chinese stocks (Red Chips and H-shares) listed on the Hong Kong stock exchange.
For A-share exposure – i.e. exposure to renminbi-denominated shares of mainland Chinese companies traded on the Shanghai and Shenzhen stock exchanges – investors could consider one of two ETFs that have recently made the debut on the London Stock Exchange: the CSOP Source FTSE China A50 UCITS ETF (CHNP) from Source, or the db x-trackers Harvest CSI300 Index UCITS ETF (DR) (ASHR) from Deutsche Asset & Wealth Management. These funds, which are both physical direct replication ETFs, track the FTSE China A50 and CSI 300 indices, respectively.