China ETFs can Deliver in 2017

Broadly speaking, emerging markets equities and exchange traded funds were solid performers last year. For example, the widely followed MSCI Emerging Markets Index gained almost 11%.

That is impressive when considering the largest emerging market, that being China, was an obvious laggard. The iShares China Large-Cap ETF (NYSEArca: FXI), the largest China ETF trading in the U.S., gained just 1.1% in 2016 while the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) tumbled 15.6%.

ASHR is the largest US-listed ETF tracking A-shares, the stocks trading on China’s mainland exchanges in Shanghai and Shenzhen. Chinese A-Shares are a specific class of equity securities issued by Chinese companies and denominated in RMB. Under current Chinese regulations, foreign investors may access A-Shares if they are a designated foreign institutional investor or gained access through either the Qualified Foreign Institutional Investor (QFII) or a Renminbi Qualified Foreign Institutional Investor (RQFII) programs.

After disappointing last year, China ETFs could have better things in store for investors in 2017.

“Morgan Stanley equity strategists Jonathan F Garner, Laura Wang and Corey Ng list three possible reasons for the rise: a return of earnings growth, a rotation by domestic investors from bonds and real estate to equities, and projections for significant Initial Public Offering fundraising in 2017,” reports Dimitra DeFotis for Barron’s.

Yuan weakness has been a point of contention for investors considering China, but that scenario could change for the better. The Chinese currency will strengthen when the yuan enters the International Monetary Fund’s basket of reserve currencies as it joins the dollar, euro, pound and yen. With the importance of the yuan growing as an alternative to the U.S. dollar, investment flows into China could help support Chinese markets and country-specific exchange traded funds.

“Our economists are highlighting a relatively tighter monetary policy and capital controls at the start of 2017 but the main planks of our optimism for onshore China equities in 2017 are intact: a) a return to earnings growth and b) asset class rotation away from bonds and property back to stocks,” according to Morgan Stanley in a note posted by Barron’s.

The Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF (NYSEArca: ASHX) acts as a hedged version of the popular ASHR while the CSOP MSCI China A International Hedged ETF (NYSEArca: CNHX) is another option for investors looking to hedge yuan exposure.

For more information on China, visit our China category.

iShares China Large-Cap ETF (NYSEArca: FXI)

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