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China ETFs Try To Rebound From Trade War Concerns

August 31, 2018 8:00 am
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China ETFs Try To Rebound From Trade War Concerns

Amid a trade war with the United States, Chinese stocks are languishing this year. The large-cap FTSE China 50 Index is down 7.1 percent year-to-date. While that's less worse than the 8.2 percent lost by the MSCI Emerging Markets Index, Chinese stocks are slumping while their U.S. counterparts are making record highs.

A wide range of U.S.-listed China exchange-traded funds are trailing the FTSE China 50 Index, but some market observers argue China overcome its trade spat with the U.S.

What Happened

Although it has recently shown some signs of life, the Global X China Consumer ETF (NYSE:CHIQ) is down 14.1 percent this year. CHIQ is down 4.3 percent this month, a decline that's perhaps a symptom of the aforementioned trade tensions. The $194.22 million CHIQ follows the Solactive China Consumer Total Return Index.

Predictably, a consumer-heavy ETF could be vulnerable to trade tensions, but CHIQ's recent struggles may overstate China's dependence on trade with the U.S.

“These are two heavyweights going at each other, so the implications are not insignificant,” said Global X. “But it is worth noting that the estimated $500 billion of Chinese exports to the U.S. account for only 20% of the total value of China’s exports. That means the U.S. tariffs on $50 billion worth of goods thus far affect only 2% of all Chinese exports.”

Why It's Important

Important to the long-term thesis for an ETF like CHIQ is China's effort to reduce dependence on exports and turn to more a internal consumption-driven economy. Data suggest that effort is bearing fruit.

“China is much less export-driven than it has been historically and exports account for far fewer of China’s GDP today versus just ten years ago,” according to Global X. “Likewise, final consumption expenditure as percent of GDP in China has grown to 38% of GDP since 2010 despite high GDP growth, which suggests that consumption is increasing faster than its notable GDP growth.”

What's Next

There is a near-term case for CHIQ, though it requires looking beyond China's trade relationship with the U.S. Data indicate there's some merit in that approach.

“Domestic and international demand for Chinese goods has remained robust thus far,” said Global X. “Export and import data have not yet shown ill effects from the trade war bluster. Exports rose 12.2% year-over-year in dollar terms in July and imports jumped 27.3%, with the country achieving an overall trade surplus in July of $28 billion.”

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