China ETFs: Buy The Dip?

Chinese equity investing has been in dire straits this year thanks mainly to trade war tensions with the United States. The four-month old battle of rhetoric has now became reality with two countries announced tit-for-tat tariffs on $50 billion of each other's goods. If this was enough, President Trump now plans to slap tariffs on an additional $200 billion in Chinese goods.

This sent Chinese Stocks into a bear market in late June. Most of the China ETFs have been in the red this year. KraneShares CSI China Internet ETF KWEB witnessed the highest year-to-date gains of 1.7 percent, while Xtrackers Harvest CSI 500 China-A Shares Small Cap Fund ASHS lost the most, down 18.8 percent. In fact, ASHS was down the most in the last three-month frame too, having lost about 18.8%.

Time To Buy The Dip?

Chinese stocks may offer 20 percent over the next three years despite the trade conflicts, per the founder and chief investment officer of APS Asset Management Pte in Singapore.  If tensions over trade and technology fade out, the gain could skyrocket as much as 50 percent, as quoted on Bloomberg.  Shenzhen PaiPaiWang Investment & Management Co. also sees the recent stressed valuation as a good entry point.

In a bid to strengthen the economy amid trade conflicts with the United States and to restore investor confidence, The People's Bank of China (PBOC) lowered the amount of cash that some banks (which is known as the reserve requirement ratio) need to keep as reserve by 50 basis points (bps) from Jul 5.

The move is expected to free $108 billion in liquidity to quicken the clip of debt-for-equity swaps, boost lending to smaller firms and strengthen the economy. Particularly, mid-sized and small banks will see a 200-billion increase in funding from the RRR cut, which is targeted at turning around struggling or cash-strapped small businesses.

Moreover, China cut its value-added tax  rates, as part of an RMB 400 billion tax cut package in April. VAT were reduced to 16 percent from 17 percent for the sale of goods, and to 10 percent from 11 percent for transportation, logistics and construction services.

The government also planned in late April to widen "the qualification criteria for the preferential 3 percent VAT rate applied to smaller businesses and startups." Per Zhongtai Securities, the new rates will result in more than 100-billion-yuan savings for manufacturers alone. Also, China's housing market is heating up.

Mainland-listed shares, or A-shares have recently been added into MSCI Inc.'s benchmark indices. The move bolsters China's standing as a major investment destination in the world.

Related Links:

Consumer Staples ETFs Riding High On Trade War Fears

A Trade War Primer: The Tariffs Imposed, Threatened, And Expected By The US, Canada, Mexico, China And The EU