Bet on a rebound in China using these ETFs, Citigroup says

Published Tue, Sep 19 202311:03 AM EDTUpdated Tue, Sep 19 20231:31 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

China may finally be poised for an economic rebound, and several exchange-traded funds give U.S. investors a way to play it, according to Citigroup. The Chinese economy has had several false starts since the government began easing Covid restrictions, but strategist Scott Chronert said in a note to clients Monday that Citi sees the world's second-largest economy nearing a turning point. "Citi economists believe the cyclical bottom for China has almost been confirmed with [the consumer price index] turning positive, [the producer price index] deflation narrowing, export growth bottoming, and credit data improving. Macro pressure should be easing for now," the note said. A country's economy and its stock market are not always well-aligned, but ETFs that track a broad basket of Chinese stocks do seem to match up well with economic data, according to Citi. "The China equity market is currently very macro-driven and beta-oriented currently, making ETFs increasingly attractive positioning tools. We prefer following our economists and positioning for upside in China Equity ETFs as we may be nearing a cyclical bottom," the note said. Chronert compared movements of China equity ETFs with more than $100 million in assets to Citi's index of economic changes in the country over the past five years. The funds that are most correlated to the Chinese economy are the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) and iShares MSCI China A ETF (CNYA) , according to Citi's analysis. The ASHR, which has nearly $2 billion in assets, has heavy weightings in economically sensitive areas such as financials and manufacturing, according to FactSet. The fund is down about 7% year to date. ASHR YTD mountain Chinese ETFs like the ASHR have struggled in 2023 For investors who want a little more risk and potential upside in China, tech-focused ETFs could be a smarter play. The funds in Citi's analysis that were most sensitive to economic changes — in other words, the ones more likely to see a big swing when the economy rebounds — were the KraneShares CSI China Internet ETF (KWEB) and Invesco China Technology ETF (CQQQ) . Those funds are down about 8% and 13%, respectively, in 2023. Investing in China has been a volatile bet over the years, and all the ETFs listed above have been long-term underperformers compared with the S & P 500. — CNBC's Michael Bloom contributed reporting.