After a Painful 2021, Is It Time to Buy China ETFs?

Over the years, China’s economy has become a key gauge of global economic and investment health. China’s $13 trillion economy, second in size just after the United States, makes up about a third of global growth each year. So, if China’s debt-ridden economy’s growth slows down and stocks fall on regulatory stringency, which actually has been the case of late, the global economy will have to pay the price for it, in some way or the other.

The key China ETFs, including iShares China Large-Cap ETF FXI, SPDR S&P China ETF GXC and iShares MSCI China ETF MCHI, have lost 30%, 32.7% and 34.5% past year. KraneShares CSI China Internet ETF KWEB has slumped as much as 61% past year.

Against this backdrop, China stepped into its Lunar New Year 2022 — the Year of the Tiger — on Feb 1. And investment banks like Credit Suisse, BlackRock, HSBC, UBS and Goldman Sachs are suggesting it as a buy while Morgan Stanley, Bank of America and J.P. Morgan Asset Management are neutral on mainland China, as quoted on CNBC. Let’s find out what’s in store for China ETFs this New Year.

Why China Underperformed in 2021

The year was completely downbeat for China investing as the region’s stocks suffered heavily due to the regulatory crackdown on various sectors, with technology receiving special wrath. The COVID-19 pandemic has been another wall of worry. China’s government revealed a five-year plan in August 2021 outlining tighter regulation for most of its economy, with areas including national security, technology and monopolies being more scrutinized.

China’s economy expanded 4.0% year over year in Q4 of 2021, easing from a 4.9% expansion in the previous period but exceeding market consensus of 3.6%, per tradingeconomics. It marked the slowest pace of expansion since Q2 of 2020, due to a crash in the property market led by the real estate bigwig Evergrande’s debt default. Overall, in 2021, the Chinese economy grew 8.1%, representing the fastest expansion in nearly a decade, topping the government's target of above 6% and following revised 2.2% growth in 2020.

What Lies Ahead in 2022?

Per CNBC, Credit Suisse expects regulatory uncertainty to ease after a national parliamentary meeting in March, and remain subdued — at least until after the ruling Chinese Communist Party’s 20th National Congress in the fourth quarter.

However, GFM Asset Management’s Tariq Dennison predicted Beijing’s ongoing regulatory crackdown on technology could last up to 30 years, as quoted on CNBC. Still, long-term investors would love the space. New regulations are “more likely to entrench these companies and to give them wider moats,” according to Dennison.

Citigroup recently added its asset allocation to China and Japan, said Ken Peng of Citi Private Bank, published on CNBC. According to Peng, China is likely to see easing for both monetary and fiscal policy. As against the developed economies that are considering tightening of policies, China has slashed interest rates recently to boost its economy. This policy differential may steer investors toward China, which probably offers value now.

HSBC believes investors are too bearish on China. Per CNBC, Goldman Sachs forecasts 16% in gains for the MSCI China index this year as valuations fall below the Wall Street bank’s target of a 14.5 price-to-earnings ratio.

We believe the period of bloodbath in China ETFs is over now, though the market still has great uncertainties and thus has not bottomed out yet. China’s zero-Covid policy may hurt the GDP growth in the coming quarters as the manufacturing sector would be broken, casting a pall over the global supply chain.

Covid cases have been reported in the key port cities as well as the industrial hub of Xi’an, leading to lockdowns and curbs in the largest port hubs. Despite having a relatively low number of cases compared to many other countries, Beijing has been showing a stringent approach.

Overall, the consumer sector should do better due to its non-cyclical nature. Uncertainty over the tech sector is not over yet. A diversified approach is better when investing in China's equity ETFs while bonds have been faring better due to lower rates.

Below we highlight a few China ETFs that are in winning momentum now.

Global X MSCI China Energy ETF CHIE – Up 4.64% past week

Global X MSCI China Consumer Staples ETF CHIS – Up 4.2% past week

Global X MSCI China Materials ETF CHIM – Up 3.4% past week

Invesco Golden Dragon China ETF PGJ – Up 3.4% past week

First Trust China AlphaDEX Fund FCA – Up 2.7% past week

KraneShares CSI China Internet ETF KWEB – Up 1.9% past week

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.