The Chinese stock markets have reported their most volatile quarter in decades in the first three months of 2022. While equity markets have been trending lower globally due to several headwinds and worsening geopolitical tensions, China’s accelerating economic growth failed to uplift the bearish investor sentiments.
Earlier this year, China announced state-wide lockdowns in several regions, following a resurgence of Covid-19 cases in the country. As the lockdowns persist amid increasing Covid-19 cases, the country is facing severe backlogs at major ports, worsening the global supply chain disruption. Moreover, the bearish global investor sentiment is also arising as several western countries threaten to impose harsh sanctions on China if it aids Russia in the ongoing conflict with Ukraine. In addition, concerns surrounding the potential U.S. delisting of Chinese stocks also triggered panic selling among investors holding American Depository Receipts (ADRs) of Chinese companies listed in the U.S.
At the time of writing this article, the Shanghai Composite Index was down 10.66% year-to-date, while the benchmark Hong Kong Feng Shui Index plunged 6.52% over this period.
Will the Chinese Stock Market Rebound Soon?
The current market correction is the best time to invest in quality Chinese stocks and ETFs, given the promising growth prospects of the country. China is on track to become the world’s largest economy by the next decade, according to economists. It was the only country to register positive GDP growth in fiscal 2020, despite a record contraction reported in the first quarter due to the pandemic-fuelled nationwide lockdowns.
China expects its GDP to rise 5.5% in fiscal 2022. While this is the lowest economic growth target in nearly three decades, it is considerably higher than the economic growth forecast of the Western countries. On April 1, Citigroup raised its Chinese GDP growth forecast from 4.7% to 5%.
Citi’s chief China economist Xiangrong Yu said, “Given the strong start of the year and the anticipated government support, we revise up our growth forecast from 4.7% to 5.0% for 2022.” This comes following the better-than-expected retail sales growth reported in the first two months of 2022 and anticipated government investments and subsidies to boost consumption.
Thus, now is the right time to invest in fundamentally sound Chinese ETFs. Currently trading at a discount, these ETFs are well-positioned to make a stellar rebound in tandem with the economy, allowing early investors to cash in immense capital gains.
Global X MSCI China Financials ETF (CHIX)
CHIX is a passively managed ETF that invests in large and mid-cap financial companies based in China. With $116.36 million worth of assets under management, the ETF closely tracks the benchmark MSCI China Financials 10/50 index. CHIX has a total expense ratio of 0.65% and has 99 holdings. 32.92% of its net assets are invested in major Chinese banks, while 20.3% is invested in retail banks and 16.95% in investment banks and brokers. In addition, the ETF has invested 12.87% of its total portfolio in multi-line insurance companies based in China. Its top four holdings are China Construction Bank, Ind & Comm Bank of China, Bank of China, and Ping An. Combined, these four stocks have a 35.65% weightage in CHIX.
The ETF has declined marginally year-to-date and 2.85% over the past month. Nonetheless, as the government of China gears up to hike benchmark interest rates, CHIX is expected to erase these losses and reach new highs soon.
Invesco Golden Dragon China ETF (PGJ)
PGJ invests at least 90% of its assets in Chinese stocks listed in the United States. With 82 holdings, the ETF has a market value of $244.40 million, as of April 7, 2022. Also, the ETF tracks the Nasdaq Golden Dragon China Index and is rebalanced and reconstituted every quarter.
Approximately 53.03% of PGJ’s total assets under management are invested in Chinese consumer discretionary stocks, while 22.77& and 8.29% of the total funds are invested in communication services and information technology sectors respectively. The ETF’s top five holdings, as of April 7, 2022, are – Alibaba Group Holding, NIO Inc., Baidu Inc., Pinduoduo Inc., and JD.com Inc. These stocks have a combined weightage of 40.06% in the ETF.
PGJ has a total expense ratio of 0.69%. In addition, the ETF has gained 5.1% since its inception.
Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD)
CHAD is an inverse ETF betting against the current market trends to generate returns. The ETF aims to generate returns that are 100% of the inverse of the performance of the CSI 300 index. If you are betting against the speedy recovery of China, this ETF might be perfect for you.
CHAD has invested approximately 21.06% of its total funds in the financials sector, 16.25% of the AuM in the information technology (IT) sector, 14.91% in the consumer staples sector, and 14.74% in the industrials sector. The ETF’s top 10 holdings are Moutai, Amperex Tech, Merchants Bank, CN Ping An, Wuliangye, Longi Green, Midea Group, EAST Money Info, IND Bank, and Yangtze Power.
CHAD is one of the few China-based ETFs that has registered positive growth year-to-date. The ETF has gained 14.84% year-to-date and 8.64% over the past month.
The CHAD ETF could be a smart hedge to add to an investment portfolio, should the anticipated recovery in Chinese equities not eventuate in the short-medium term.
VanEck China Bond ETF (CBON)
CBON invests in fixed-rate Renminbi-denominated bonds issued by the Chinese government, quasi-government, and credit issuers. The debt ETF closely tracks the ChinaBond China High Quality Bond Index. With 125 total portfolio holdings, CBON manages assets worth approximately $172.67 million. 48% of its total assets under management are invested in the financials sector, while 18.8% are allocated towards government bonds. The industrials and basic materials sectors have an 11.8% and 9.3% weightage in the ETF, respectively.
The ETF has a net expense ratio of 0.50%. It has invested the majority of its assets in China Government Bonds, China Development Bank, Beijing State-Owned Capital Operation, and China Cinda Asset Management Co. Ltd.
CBON has gained 7.22% over the past year (as of March 31, 2022), and 0.52% in the first three months of 2022.
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