These China ETFs Are Ready To Rally

Chinese stocks are struggling this year, and it hasn't made a difference whether stocks in question trade in Hong Kong or on the mainland, also known as A-shares. A benchmark exchange-traded fund tracking some of the largest Hong Kong-listed names is down 9.2 percent year-to-date.

That is bad. Worse yet is the 17.5 percent year-to-date loss suffered by the largest A-shares ETF trading in New York. Making matters even worse is the fact that the MSCI Emerging Markets Index is off just 1.1 percent this year. But, as the old maxim instructs, when there is blood in the streets, it is time to buy. That could be the case with A-shares.

'Blood In The Streets'

CSOP Asset Management, the largest renminbi-qualified institutional investor (RQFII) in the world and an issuer of several ETFs trading in New York, expects A-shares will rally over the next two months. That could boost the firm's ETFs, including the CSOP FTSE China A50 ETF AFTY, CSOP's first ETF to trade in the United States.

Related Link: How Yuan Policy Affects China ETFs

CSOP fund manager cited several catalysts for a possible A-shares rally include easing capital outflows and robust international liquidity.

“Overseas liquidity situation will remain favorable till June before when the Federal Reserve may not raise rates. The capital outflow pressure from China will be relieved,” said Lu. “China’s central government gave first priority to economic growth and chose to stimulate property and investment. We saw people buying property after major cities in China saw property price jumped 20 percent - 50 percent YoY in January 2016. A capital city in Northeastern part of China is considering ZERO down payment, one of the evidences that local government are eager to destock the inventory.”

If the yuan remains stable, AFTY, which does not feature a currency hedge, could shine as A-shares rebound. AFTY, which debuted nearly a year ago, allocates almost two-thirds of its weight to large- and mega-cap Chinese financial services firms.

A Hedged Option

AFTY has a currency hedged cousin, CSOP MSCI China A International Hedged ETF (NYSE: CNHX), which could be worthy of consideration if the People's Bank of China (PBoC) takes aim at the yuan in a bid to defend exporters.

The CSOP China CSI 300 A-H Dynamic ETF is a currency-hedged solution for A-shares equities. That new ETF follows the MSCI China A International Index. Notably, it is the stocks in that index that MSCI will add to its international benchmarks when the index provider decides to elevate A-shares.

CNHX came to market in October.

“China’s central bank provided favorable monetary policy. Record amount of new loan in January 2016 and we may see the trend to continue in February and March. Last time the PBOC cut the reserve ratio requirement aggressively was April 2015 and the market jumped in the following months. We may see similar pattern this time after PBOC did so again,” added Lu.