Although many diversified and single-country emerging markets exchange traded funds have been solid performers this year, the same cannot be said of China, the largest developing economy. ETFs such as the iShares China Large-Cap ETF (NYSEArca: FXI), the largest China-related ETF trading in the U.S., and the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) have been struggling.
But there are inklings of upside for China ETFs, including ASHR. ASHR is the largest ETF trading in the U.S. that holds China A-shares, the stocks trading on mainland exchanges in Shanghai and Shenzhen. Earlier this month, China ETFs retreated after index provider MSCI said it is again delaying the inclusion of China A-shares, the stocks trading in Shanghai and Shenzhen, in its widely followed emerging markets indexes.
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.
ASHR “declined from a high of $48.43 to a February low of $20.90. After rallying slightly off the low, the ETF has been trapped in a range between $24.30 and $22.61 since early May. Given the extreme movement which took place over the last year, if volatility returns, a breakout of this range could be significant. Just based on the size of the range ($24.30 – $22.61 = $1.69), if the price rallies above $24.30 the initial target is $25.99. If the price drops below $22.61 the initial target is $20.92. Secondary targets are $$27.30 on the upside and $19.46 on the downside. These targets are based on the larger triangle pattern which has been forming since March,” according to Investopedia.
Related: Big China ETFs Draw Bearish Bets
Despite a rebound in March on government stimulus, weak economic data, like shrinking private investment and worse-than-expected credit growth, continue to weigh on China’s outlook. Beijing is struggling to maintain a 6.5% annual growth rate through 2020 while preventing debt from expanding. The mid-term outlook remains pressured by rising credit, excess industrial capacity and financial sector risks, according to the International Monetary Fund.
For more information on the developing economies, visit our emerging markets category.
Deutsche X-trackers Harvest CSI 300 China A-Shares Fund
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.