Invesco Golden Dragon China ETF (PGJ)

A looming trade deal between the U.S. and China is bullish for the Chinese stock market. When Invesco Golden Dragon China ETF is compared to iShares China Large-Cap ETF, FXI appears to be a better choice. Seeking Alpha ETF Grades highlight the differences between PGJ and FXI.

April saw a sharp stock market drop due to Trump's aggressive new tariffs, especially on China.

I am bearish on China's long-term prospects, despite a recent 4.5% rise in the index since June 2024, due to government stimulus measures. The People's Bank of China's September stimulus included lower bank reserve requirements, mortgage rate reductions, and subsidized business loans, temporarily boosting markets. Recent market gains from the stimulus have retracted, highlighting persistent underlying issues in China's economy despite short-term boosts.

One of the top themes year-to-date has been China-focused technology ETFs. China technology stocks have surged on AI enthusiasm related to China startup DeepSeek's AI model launch.

Invesco Golden Dragon China ETF has underperformed with a volatile history and an annualized total return of only 4.7% since inception. PGJ is heavily concentrated in consumer discretionary stocks, making it highly sensitive to economic cycles and vulnerable during downturns. China's long-term structural challenges, including population decline, high household debt, and a housing market bubble burst, will likely hinder PGJ's future performance.

Chinese stocks appear undervalued and could offer diversification from US markets, which are currently priced for perfection. Valuations in China are much lower compared to the US, making it a contrarian buy, especially during periods of negative sentiment. Invesco Golden Dragon China ETF is holding mostly ADRs from technology companies, which comes with additional risks, which I am not comfortable with.

Exchange-traded funds overseas that track Chinese stocks continued their rally Wednesday even as mainland markets were shut for a week-long holiday.

Aggressive interest rate cuts by PBoC coupled with potential expansionary fiscal policies that target consumer spending have stoked positive animal spirits. Market breadth has improved on China CSI 300 and Hong Kong Hang Seng Index.

China ETFs have surged on the back of a blitz of stimulus measures by the country's government to revive the world's second-largest economy.

Although concerns over China's economic challenges remain rife, some billionaire investors are betting big on China ETFs.

The latest figures published by the People's Bank of China show that credit and liquidity are stalling as demand for new loans declines. Deteriorating confidence in China's prospects explains why households prefer paying down debts while companies borrow less.

Data came in generally in line or slightly weaker than forecasts, as weak confidence continued to depress investment and consumption. New home prices fell by -0.65% MoM in July, compared to a -0.67% MoM drop in June.

The People's Bank of China kept the one-year medium-term lending facility rate unchanged at 2.5% today, in line with market expectations. We believe that in conjunction with today's data releases and the start of rate cuts in other central banks such as the European Central Bank and Bank of Canada, the odds of a PBoC rate cut in the coming months have risen.

Key economic indicators are mixed in China and, in fact, were mostly weaker than expected last month. So, policymakers are now stepping up support for the property sector in particular.

China's stock market is in the midst of a rally. Should upside continue, it opens the pathway for investment opportunities in a pair of Invesco exchange traded funds (ETFs).

The Invesco Golden Dragon China ETF has slightly outperformed the S&P500 returns since late January. The recent economic data in China shows an uneven dynamic of key indicators, though this shouldn't deter further investing, for now. While it's not the time to completely get rid of Chinese stocks now, investors should exercise caution before getting more exposure to Chinese equities.