ETFs in Focus as Trade War Takes a Toll on Chinese Exports

China’s export data for August lagged analysts’ expectations and disappointed investors. Recently, a Bloomberg Economics gauge assessing the earliest available indicators had shown a persistent slump in China’s economic growth due to tough external conditions in August (read: ETFs in Focus on China's Economic Slowdown in August).

What do the Numbers Say?

Chinese exports fell 1% year over year in August against analysts’ expectations of a rise of 2.2%. The economists were forecasting a rise in exports majorly on the grounds of China’s yuan depreciation of around 3.8% in  the month that would have eased some cost pressure for exporters. Moreover, analysts were expecting Chinese exporters to ‘front-load’ supplies in August in response to the new tariffs that were applicable from September 1. In this regard, Zhang Yi, economist at Zhong Hai Sheng Rong Capital Management, commented that, “exports are still weak even in the face of substantial yuan currency depreciation, indicating that sluggish external demand is the most important factor affecting exports this year”  (read: 4 Dividend ETFs to Ride Out Trade War Uncertainty).

Meanwhile, China’s import levels in August declined 5.6% year over year in comparison to analysts’ expectations of a 6.4% year-over-year decline. Thus, China reported a trade surplus of $34.84 billion in August against analysts’ projections of a surplus of $43 billion.

What’s Causing the Disappointment?

Escalating trade war tensions between the United States and China have been affecting China’s economy. Notably, China’s exports to the United States had fallen 16% year over year in August compared with a decline of 6.5% in July. Moreover, Chinese imports from the United States contracted 22.4% year over year. Also, China’s trade surplus with the United States came in at $26.95 billion in August  against $27.97 billion in July.

Retaliating to President Trump’s early August attack, China imposed new tariffs of 5% to 10% on $75 billion worth of U.S. goods, effective on some items from Sep 1 and others from Dec 15. The raised duties will be levied on nearly 5,078 U.S. products , including agricultural goods like soybeans and coffee along with whiskey, seafood, aircraft and crude oil. Trump responded by raising tariffs on $550 billion worth of Chinese goods. He lifted existing tariffs to 30% from 25% on $250 billion of Chinese imports effective Oct 1.  Moreover, tariffs planned on a further $300 billion in Chinese goods will be revised to 15% from 10%  in two stages — Sep 1 and Dec 15 (read: Trade War Gets Uglier: Here Are the ETF Winners & Losers).

Weakening domestic market due to softening consumption and investment levels and disappointing global commodity prices have been causing the slump in China’s import levels.

A slowdown in global economic growth is being observed with Trump making rampant attacks to defend his America First agenda. China’s export levels to Europe, South Korea, Australia, and Southeast Asia were also disappointing in August.

What to Expect?

The latest round of statements coming from the United States and China provided some respite to investors. China’s Ministry of Commerce recently announced that the country is looking forward to another round of face-to-face trade negotiation with the United States in September. It also added that China is planning not to immediately respond to Trump’s recent tariff hike.

Also, Beijing recently rolled out a key rate reform to lower funding costs for firms in order to lend support to China’s struggling economy. As a result of the new policy, banks must fix rates on new loans by mainly referring to the Loan Prime Rate (LPR) and use LPR as the benchmark for setting floating lending rates. It is also planning to further lower the cash reserves required to be kept with banks in order to improve their lending capacities.

However, given the new rounds of tariffs being scheduled to be imposed on Oct 1 and Dec 15 along with bleak chances of a resolution in the trade war this year, the slump in the export levels is expected to continue. Also, the Trump administration has levied duties of up to 141% on Chinese structural steel and up to 31% on Mexican structural steel. Based on these rates, the U.S. government will start collecting cash for imports.

ETFs in Focus

Against this backdrop, investors can keep a tab on a few China ETFs like iShares China Large-Cap ETF FXI, iShares MSCI China ETF MCHI, Xtrackers Harvest CSI 300 China A-Shares ETF ASHR and Invesco Golden Dragon China ETF PGJ.

FXI

This fund seeks long-term growth by tracking the investment returns, before fees and expenses, of the FTSE China 50 Index. It comprises 50 holdings. The fund’s AUM is $4.34 billion and expense ratio is 0.74% (read: ETFs in Focus as US Imposes New Tariffs on Structural Steel).

MCHI

This fund tracks the MSCI China Index. It comprises 464 holdings. The fund’s AUM is $3.71 billion and expense ratio is 0.59% (read: Global Stimulus & Huawei Relief Boost Markets: ETFs in Focus).

ASHR

This fund tracks the CSI 300 Index. It comprises 310 holdings. The fund’s AUM is $1.41 billion and expense ratio is 0.66% (read: Should You Buy China ETFs Now?).

PGJ

This fund follows the NASDAQ Golden Dragon China Index, which offers exposure to the U.S. exchange-listed companies that are headquartered or incorporated in the People’s Republic of China. It holds a basket of 68 stocks. The product has AUM of $188.5 million and charges 70 bps in annual fees (read: Dump Slowdown Fear, Bet on These China ETFs).

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Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR): ETF Research Reports
 
iShares China Large-Cap ETF (FXI): ETF Research Reports
 
iShares MSCI China ETF (MCHI): ETF Research Reports
 
Invesco Golden Dragon China ETF (PGJ): ETF Research Reports
 
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