China has experienced its fair share of negative economic indicators over the short-term, but exchange traded fund investors should not overlook the potential long-term growth opportunity.
Beijing is trying to “manage” an economy that is expanding at around a 7.5% clip, the market is still in the development stages and the country has a huge population to power the economy forward, according to Capital Cube.
Additionally, now is an opportune time to get in on Chinese equities on the cheap. China stocks are trading around 10x earnings, compared to the U.S. markets where the S&P 500 index is hovering around 17.5 price-to-earnings.
Moreover, the country is implementing financial reforms, albeit slowly. For instance, a new pilot program set for next month will allow trading in local currency for investors through the Hong Kong stock exchange.
Nevertheless, there are some factors that are keeping Chinese stocks from reaching their full potential. Specifically, some are concerned with Beijing’s ability to manage its long-term growth forecasts without deregulating the financial industry, along with rate liberalization, a free floating currency and limits on current account flows. Additionally, the country is experiencing a real estate bubble, slowdown in manufacturing and reduction in foreign investments.
The iShares China Large-Cap ETF (NYSEArca: FXI) is seen as a relatively safe way to gain Chinese market exposure. The ETF has been around for over 10 years and tracks some of the largest Chinese companies. FXI will soon track 50 large-cap Chinese firms. [Big China ETF to get a New Index]
FXI, though, is heavily tilted toward the financial sector, which makes up over 50% of the portfolio. However, the ETF could benefit as the government moves ahead with increased financial reforms.
Additionally, the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) provides investors access to domestic Chinese A-shares. Through the RFQII program, ASHR gains foreign access to local Chinese markets. The ETF includes a slightly lower tilt toward financials at 34% of the portfolio, so investors may find more sector diversity. The relatively new fund has been a popular addition to the ETF universe, growing its assets under management by over 200% in just a few months. [Strong Demand Forces Deutsche to Limit Creations in A-Shares ETFs]
As China’s government shifts over to a consumer driven economy, such as the U.S. where consumer spending make up almost 70% of the economy, Chinese equities could begin to outperform many global economies.
For more information on China, visit our China category.
Max Chen contributed to this article.