China ETFs Fall As Economy Shows Signs Of Contraction For The Second Consecutive Month

China's sudden and explosive growth trend has entered a phase of decline. 

New data from the month of May shows manufacturing activity stagnating for the second consecutive month, as the country's manufacturing purchasing managers’ index dropped to its lowest point since January.

China experienced a spike in manufacturing activity as the country announced an end to harsh COVID-zero policies in December. By late February, the PMI was peaking and showcasing its fastest growing rate in over 10 years.

Yet growth is proving to be short-lasting. By March, the PMI index was lower than in February, and in April it reached 49.2. Any level below 50 is indicative of contraction. May’s number came in below expectations, at 48.8, suggesting the country's post-COVID recovery is losing its momentum.

Analysts at Japanese investment bank Nomura told the South China Morning Post they expect manufacturing PMI to remain in contraction during June.

What's Causing China's Slump?

Several measures of China's economic activity fell last month, including imports, factory gate prices, property investment, industrial profits, factory output and retail sales, reported Reuters.

Earlier this month, Nomura cut its 2023 GDP growth forecast for China from 5.9% to 5.5%, a 6.7% drop.

The analysts said China's headwinds are part of "a structural property slump, a deepening global manufacturing downturn and worsening geopolitical tensions."

Rising competition with the U.S. and its economic allies is putting pressure on some sectors within China's industry, including tech manufacturing.

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A report published on Tuesday by China Beige Book, a U.S.-based firm, said that China's real estate market is also showing stagnation, in spite of earlier signs of improvement.

The property market, which represents a fifth of the country's economy when accounting for related sectors, saw sales drop during May. Home sales fell 14.3% from April to May.

The non-manufacturing PMI, which illustrates the state of the construction and services sectors, didn't fall below the 50 mark, but grew at its lowest pace in four months, reaching 54.5 in May, down from 56.4 in April.

Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc., told Bloomberg that China could be headed into a "K-shape recovery," meaning that some sectors in non-manufacturing might be recovering while others may enter a recession.

Youth unemployment is also weighing on the population's spending strength. Official data released this week puts urban unemployment for 16-to-24-year-olds above 20% — 4 times higher than the overall level, as many of the country's recently college-graduated workforce are forced to take jobs below their skills, CNBC reported.

"For consumers, there are concerns about the future — you don't really want to spend," Hui Shan, chief China economist at Goldman Sachs, told the Financial Times.

The Hang Seng Index, which follows the trajectory of the Stock Exchange of Hong Kong, dropped almost 2% on Wednesday at the time of writing, and is down 5.4% in the last five days and 9.5% in May.

The index touched 18,044.86 points on Wednesday, which is technically bear territory, as it stands 20.5% below its 52-week closing high.

U.S.-listed China ETFs are also reacting negatively to recent data.

• iShares MSCI China ETF MCHI lost 0.7% of its value on Wednesday at the time of writing and 4.3% in the last five days.

• KraneShares CSI China Internet ETF KWEB dropped 1.2% on Wednesday and 4.7% in the last five days.

• SPDR S&P China ETF GXC lost 0.7% on Wednesday and 4.7% in the week.