Why China May Be Ripe for a Rebound

We are rapidly approaching the end of the second quarter and it remains unclear what role China will play in the global growth story. The International Monetary Fund currently projects Chinese growth at a rate that would be the envy of most developed economies and above the average for emerging markets, but the pace doesn’t match China’s meteoric growth of recent memory. If you do wish to invest in China’s potential growth, one way to dip your toe in those waters is through the iShares China Large-Cap ETF (FXI).

This fund attempts to match the price and yield performance, before fees and expenses, of an investment fund focused on the 25 largest and most liquid Chinese companies traded on the Hong Kong Stock Exchange. These companies operate in mainland China and include red chips (Chinese companies incorporated outside China), p chips (Chinese companies incorporated in the Cayman Islands, Bermuda and the British Virgin Islands) and H Shares (companies incorporated inside mainland China).

The exchange-traded fund (ETF) is down about 1% this year, largely due to drops in February and March. FXI has nearly recovered from these dips and is currently trading well above both its 50- and 200-day moving averages. This ascent reflects the slightly positive May Purchasing Managers’ Index, which indicated continued soft growth. FXI also offers a yield of 2.76%.

FXI invests most heavily in financials, 52.25%; telecommunications, 14.78%; and oil & gas, 12.44%. This ETF’s top 10 holdings make up 59.77% of its portfolio. Companies in this top 10 include Chinese Construction Bank H Shares, 9.21%; Tencent Holdings Ltd, 8.76%; China Mobile Ltd, 7.90%; Industrial & Commercial Bank of China H Shares, 7.20%; and Bank of China, Ltd H Shares, 6.44%.

China’s government has indicated that it will be taking measures to ensure that the country’s economic growth continues to match expectations. The open question is whether this support will take the form of continuing to deregulate financial services and other market-liberalization measures, or whether the government will keep pouring money into infrastructure. Of course, it also remains to be seen if either of these measures will be effective.

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In case you missed it, I encourage you to read my article from last week about an emerging markets ETF. I also invite you to share your thoughts below.