ETFs for a Bargain China Play

Volatility sent mainland Chinese equities plunging, but Chinese company stocks that trade on Hong Kong, along with H-shares related exchange traded funds, were not as heavily affected and may also offer investors a cheaper way to capture China’s growth.

Over the past three months, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), which tracks mainland China A-shares that trade on the Shanghai and Shenzhen stock exchange, declined 33.3%.

Meanwhile, the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF that tracks Chinese companies listed on the Hong Kong stock exchange, fell 21.2% over the past three months. Similarly, other China H-shares ETFs options including the SPDR S&P China ETF (NYSEArca: GXC) and the iShares MSCI China ETF (NYSEArca: MCHI) dropped 15.8% and 19.0%, respectively, over the past three months.

China H-shares that trade in Hong Kong did not experience the same level of selling as mainland Chinese markets due in part to the absence of circuit breakers, reports Jennifer Hughes for the Financial Times.

Chinese company stocks that trade in Hong Kong are not a perfect way of expressing views on China as there is a limited pipeline between Hong Kong and Shanghai, which restricts efficient arbitrage between the two markets. The the two markets, though, are beginning to open up through the new stock connect program.

Consequently, despite the horrible start to the new year, China A-shares are still trading at a 40% premium to their Hong Kong-listed H-shares counterparts – the Hang Seng China Enterprise Index shows one of the cheapest valuations in the world at six times expected earnings.

China ETFs are also trading at some cheap valuations. For instance, FXI shows a 8.8 price-to-earnings, GXC has a 9.4 P/E and MCHI trades at a 9.5 P/E. In contrast, ASHR has a 13.5 P/E and the S&P 500 Index is trading at a 17.0 P/E.

With some of the cheapest valuations around, hedge funds and other investors are taking an interest in Chinese companies listed in Hong Kong as a way to take a position in China’s growth, Hughes reports.

iShares China Large-Cap ETF


Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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