In a country where the annual gross domestic product (GDP) growth rate could be eight percent, its stock market should be a good place to invest, right? Well, according to the portfolio strategy research team at The Goldman Sachs Group, Inc. (NYSE:GS), China’s economic growth will come back in the final quarter of this year. Moreover, the country’s growth rate is expected to accelerate to an annualized rate of eight percent.
For investors who want to invest in China’s growth, here are two exchange traded funds (ETFs) to take a look at:
iShares China Large-Cap (NYSEArca:FXI)
If you think that China’s stock market will not make a comeback, think again. The country has adopted extraordinary measures to stop the stock market from crashing. Since the start of the tumble in June, the People’s Bank of China has cut its benchmark interest rates and lowered reserve requirements twice.
The regulators have also banned major shareholders of public companies from selling their shares. Moreover, the nation is allowing pension funds managed by local governments to invest in the stock market for the first time. The idea is simple: the country is willing to do whatever it takes to bring the bull market back.
It seems to have worked. On Thursday, August 27th, markets rallied in China. During the surge, large-cap stocks gained strong momentum. But for a lot of them, there are still long ways to go to reach their pre-crash highs. If the upward trend continues, there is one ETF that can provide investors with serious returns—the iShares China Large-Cap (NYSEArca:FXI) ETF.
Started in October 2004, FXI seeks to track the investment results of an index composed of large-cap Chinese equities that trade on the Hong Kong Stock Exchange. By investing in this Chinese ETF, investors can get access to 50 of the largest Chinese stocks in a single fund. The top three of FXI’s holdings are Tencent Holdings LTD, China Mobile LTD, and China Construction Bank Corp.
The fund closed at $37.47 on Thursday with a net asset value of $36.61. FXI has net assets of $5.9 billion, and an expense ratio of 0.74%. Note that the fund also pays dividends with a dividend yield of 2.27%.
Global X China Consumer ETF (NYSEArca:CHIQ)
When Goldman Sachs said that China’s economic growth would be eight percent in the fourth quarter, where do you think that growth would come from? Exports? I think not.
Sure, in the past several decades, exports accounted for a substantial part of China’s economic growth. The country used to be the manufacturer of the world. But right now, things are changing. In July, China’s exports declined a massive 8.9% year-over-year.
So, where would growth come from? Consumer consumption. China is in the transition phase of shifting its growth strategy from exports to domestic demand. With a growing middle class, consumer consumption is going to be the growth engine for China.
To take advantage of this opportunity, investors should take a look at the Global X China Consumer ETF (NYSEArca:CHIQ). The ETF started in 2009 and aims to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive China Consumer Total Return Index.
The ETF has net assets of $81.1 million and a total annual fund operating expense of 0.65%. The fund closed at $11.54 on Thursday with a net asset value of $12.02. Its top three holdings are China Resources Enterprise, Alibaba Group Holding Limited, and Melco Crown Entertainment.
Some analysts are saying that China’s recent stock market crash led to the deterioration of household wealth. Sure, people lost money in the downturn, but keep in mind that equities only represented a small fraction of Chinese people’s savings.
According to Qu Hongbin, HSBC’s chief economist for Greater China, equities accounted for less than 15% of household financial assets, and therefore “the stock market wealth effect in China is smaller than many assume.” (Source: Business Insider, last accessed August 27, 2015.)
With the negative wealth effect being limited, consumer consumption is on its way to become the biggest driver of growth in the Chinese economy, and serious returns await those that invested in this booming sector.