China ETFs – Off to a Strong Start
China’s economy is at an inflection point. Canadians can gain exposure to its reopening through ETFs.
As the Chinese New Year passes, China has reached an inflection point. After recent and surprising modifications to China’s Zero-Covid policy stance—the economy is showing signs of strength reflected in the price of Chinese stocks.
However, the rapid lifting of restrictions – not to mention the coming together of families over the recent national holiday - could mean a large resurgence of Covid-19 cases, with the response from both the government and Chinese citizens largely determining the path of this reopening. Either the Chinese economy will slow down as people act more cautiously and restrictions are reimposed or it will continue to pick up momentum as the nation overlooks the surge in cases and joins the rest of the world in adapting to life beyond Covid.
Markets appear to be optimistic regarding the trajectory of the Chinese economy. The largest and most liquid China ETF in Canada, the iShares China Index ETF (XCH) has rallied 53% since its low on October 31st 2022 after having lost 52% of its value since the end of 2020. This ETF offered by BlackRock offers Canadian investors the ability to invest in the largest 50 publicly-traded companies in China, heavily focused in the Consumer Discretionary, Financials and Communication sectors.
Source: Yahoo Finance
Does this rally have legs?
Can this recent rally continue? As previously stated, that depends on the response of the Chinese government and people to the inevitable surge in Covid-19 cases. The good news is we’ve now seen this scenario play out across many different countries that have reopened. While there are some short-term pains relating to greater amounts of recorded cases, hospitalizations and even deaths—countries that have loosened restrictions have eventually gained herd immunity which allows the economy to continue to open.
There are some caveats and unique characteristics of China’s situation however, including:
1. China was in lockdown for far longer than other countries
This could lead to more difficulty, or a longer time span, in achieving herd immunity. Furthermore, the size and density of China’s population could lead to severe healthcare issues.
2. China’s government may elect to lockdown
Since the onset of the Covid pandemic, the Chinese government has maintained a strict stance on lockdowns in order to curb Covid cases. While they have surprisingly loosened their stance recently, there is still uncertainty on whether they may reverse this decision if conditions were to worsen.
3. Negative long-term growth drags
Even if China’s economy were to reopen smoothly, the country still remains in the midst of a property crisis and demographic drag that could crimp the economy’s growth over the long term. Weakened property prices and an ageing population could seriously damage the success of Chinese stocks.
Although the outlook for China remains uncertain, the hard landing in the US and a potential recession in Canada leave investors with few alternatives that offer as much potential as China at this current juncture. Earnings revisions have been nothing but positive in the new year and this momentum has a solid likelihood of continuing.
ETFs for Canadians to play the China reopening
NEO’s ETF screener is a great way for investors to review, compare and select ETFs that offer exposure to the Chinese market but three ETFs Canadians can consider to play the China reopening include:
iShares China Index ETF (XCH)
The largest and one of the most liquid ways for Canadians to access the growth potential of the largest companies in China, XCH enables Canadians to use their Canadian dollar to gain the same exposure as Americans investing in MCHI.
- AUM: $121 million
- Expense Ratio: 0.86%
- 1mo Performance: +15.9%
CI ICBCCS S&P China 500 Index ETF (CHNA.B)
A low-cost ETF offering from CI, CHNA.B allows investors to gain exposure to ~500 Chinese companies across all sectors, albeit with a tilt towards the Technology, Financials and Consumer Goods sectors.
- AUM: $49 million
- Expense Ratio: 0.59%
- 1mo Performance: +12.5%
Mackenzie China A-Shares CSI 300 Index ETF (QCH)
Mackenzie’s QCH ETF holds the China CSI 300 Index ETF, which is a Chinese-based ETF which invests in ~300 Chinese companies focused across all sectors, again with a tilt, this time towards Financials, Industrials and Technology.
- AUM: $27 million
- Expense Ratio: 0.71%
- 1mo Performance: +8.5%
Data as of January 25, 2023.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
