China ETFs to Watch on Strong Manufacturing Data - ETF News And Commentary


News about the Chinese economy continued to make it to the headlines for the wrong reasons. However, this time around, China divulged some good news which might lead the China bulls to believe that the world's second largest economy might after all avoid a hard landing in 2014.

The recent manufacturing numbers indicate that the most important emerging market is returning to life thanks to some of the mini-stimulus measures taken by their government lately.

Manufacturing Data

The data revealed that the flash HSBC/Markit Flash China Manufacturing Purchasing Managers' Index rose to 50.8 in June, an increase from last month's final reading of 49.4 and exceeding market expectations. The most important point was that China's manufacturing activity expanded this month for the first time this year.

The figure came in above the key contraction/expansion demarcation point of '50.0' signaling that the Chinese manufacturing segment has moved to growth territory after six long months. Moreover, the survey indicated across-the-board improvement in the factory sector.

Other Recent Data Points

Apart from the recent positive manufacturing data, May retail sales increased at a better-than-expected rate of 12.5% year over year, the best since December. Moreover, industrial production data also rose at a more-than-estimated rate and lending data for May showed that the amount of new bank loans exceeded expectations (see China ETF Investing 101 ).

However, fixed asset investments expanded by 17.2% year over year for the January-to-May period, representing the weakest pace for that period since 2000.

What's behind the recent optimism?

As a reminder, the Chinese economy had expanded by 7.4% in the first quarter of 2014 as against 7.7% in the final quarter of 2013 (read: Copper ETFs Tumble on China Growth Concerns) . This along with debt defaults in China's trust loans market had led to widespread doubts about the health of the Chinese economy.

In order to boost growth, which fell to an 18-month low, the Chinese government has since then unveiled a series of mini-stimulus measures including tax breaks for small enterprises, targeted reserve requirement cuts for some banks, incentives to encourage lending in rural areas and targeted infrastructure outlays. This appears to be having an impact, or at least helping to boost confidence across the nation.

ETFs to Watch

Investors are advised to keep an eye on China ETFs after the bullish manufacturing data. In the large cap sphere, one can expect activity in the iShares FTSE China 25 Index Fund ( FXI ), iShares MSCI China Index Fund ( MCHI ), SPDR S&P China ETF ( GXC ) and PowerShares Golden Dragon Halter USX China Portfolio ( PGJ ).

For investors willing to bet on the more locally focused China-A-Shares market, funds such as db X-trackers Harvest CSI 300 China A-Shares Fund ( ASHR ),   Market Vectors China ETF ( PEK ) and China A-Share Portfolio ( CHNA ) can be kept on the radar (read: China A-Shares ETFs Explained ).

Bottom Line

The above ETFs are likely to see some up moves based on these figures. The recent pick up in manufacturing data signals a return of optimism in the Chinese economy, which has been plagued by lingering concerns of a slowdown.

The Chinese government has been proactive in its efforts to bring its economy back to health. "We expect policy makers to continue their current path of accommodative policy stance until the recovery is sustained," said Qu Hongbin, HSBC's chief China economist .

Investors should however keep in mind that most of the market experts expect China to grow by less than the 7.5% annual target rate set by the country. Property market bubble and debt issues continue to plague the nation as has been reflected in the negative performance of China equities this year.

Excluding some China Technology ETFs, most of the other China equities ETFs have delivered negative returns since the start of the year, with the China-A shares ETFs having been the worst hit, so clearly more needs to be done to soothe investor fears about this giant emerging market economy, though these manufacturing numbers are a step in the right direction.

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ISHARS-CHINA LC (FXI): ETF Research Reports

ISHARS-MS CH IF (MCHI): ETF Research Reports

SPDR-SP CHINA (GXC): ETF Research Reports

MKT VEC-CHINA (PEK): ETF Research Reports

PWRSH-CHA A-S P (CHNA): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: FXI , MCHI , GXC , PEK , CHNA

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