China-focused exchange-traded-funds turned the other cheek when the country’s latest gross domestic product numbers showed that economic growth slowed to 6.5% year-over-year in the third quarter, missing expectations of 6.6%.
Nonetheless, the biggest China ETFs based on total assets were up on Friday–iShares China Large-Cap ETF (NYSEArca: FXI) was up 2.55%, iShares MSCI China ETF (NasdaqGM: MCHI) rose 1.85% and KraneShares CSI China Internet ETF (NYSEArca: KWEB) gained 1.33%. The rise was largely due to a rebound in Chinese equities as the Shanghai composite and the Shenzhen composite both surged 2.58 percent, while Hong Kong’s Hang Seng index rose 0.51 percent.
Thursday’s sell-off in Chinese equities caused the Shanghai index to fall to a low not seen since November 2014. As a result, top Chinese officials from the People’s Bank of China issued public statements to help quell the fear in the markets.
“The recent stock market volatility is primarily the result of investor expectations and emotions,” said the Chairman of the People’s Bank of China, Yi Gang.
China Securities Regulatory Commission Chairman Liu Shiyu issued a separate statement to help re-instill confidence in the capital markets.
“[We will] encourage local government-managed funds, qualified private equity investment funds, broker-managed products or newly organized funds, to help relieve the stock pledge difficulties of public companies with good prospects but are temporarily facing operational difficulties, so they can develop healthily,” Liu said.
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China Prepped for Full-Blown Trade War
The jitters in the country’s markets could put China in a precarious position if trade wars persist with the United States, However, a white paper published by China last month revealed that the country can economically withstand the effects of a long, drawn-out trade war between the two economic superpowers, but it took extra measures for preparation when the Chinese central bank cut the amount of reserves held by banks.
The move was announced when the People’s Bank of China instituted a 100 basis points cut to the reserve requirement ratio for a majority of banks, resulting in a capital injection of 750 billion yuan or $109.2 billion to help shore up the banking system. The central bank confirmed that this latest policy move was done in accordance with the pace of the economy as opposed to an accommodative move.
Nonetheless, the words alluding to resiliency may be just that, according to some experts and that the situation is more dire than China is leading the markets to believe.
“China is probably facing its worst period since the global financial crisis. All news is against it,” said Fraser Howie, an independent analyst who has covered China and its financial system.
“They certainly want to play down any talks of panic or near panic … but they’re clear it’s not business as usual in China,” Howie added.
Multinational investment bank J.P. Morgan expects the tariff-for-tariff battle to escalate into a full-blown trade war. Just recently, the firm lowered its ratings for Chinese stocks from neutral to overweight, citing that the trade wars will heighten to a point where its economy is substantially impacted.
“A full-blown trade war becomes our new base case scenario for 2019,” emerging market strategist Pedro Martins Junior said in a note. “There is no clear sign of mitigating confrontation between China and the US in the near term.”
U.S. President Donald Trump imposed a 10% tariff on $200 billion worth of Chinese goods that includes a step-up increase to 25% by the end of the year. The administration moved forward with the tariffs despite both economic superpowers in the midst of scheduled trade talks to ease tariff tensions, but nothing substantial has materialized as of yet.
In less than 24 hours, China responded with $60 billion worth of tariffs on U.S. goods that began in late September. The new round of tariffs from China are said to affect a list of 5,207 products within a range of 5 to 10% as both the U.S. and China have already slapped each other with tariffs worth $50 billion total.
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