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China ETFs for the Mainland’s “Soft Economic Landing”

06 December 2011 at 2:26 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

In 2004, South Korea and Australia began exporting more to China than they did to the United States. By year-end 2008, Japan and Brazil exported more to China than to the U.S.

Not surprisingly, when the Chinese government expressed an intention to rein in rampant inflation through tighter fiscal and monetary policy (November 2010), many countries that depend on their exports to China began a year-long bearish retreat. In fact, ETFs for resource-rich countries (e.g., Brazil, South Africa, Chile), as well as China itself, were hit the hardest.


Granted,¬†the sovereign debt crisis in the Eurozone¬†also¬†played a large role in poor performance. Nevertheless, the fear that tightening in China would lead to lower demand for the world’s products, services and commodities played the largest role¬†in damaging¬†the emerging market growth¬†story.

In my estimation, though, worry is being replaced by anticipation. Whereas double-digit GDP and rapidly rising consumer prices encouraged China to tighten, recent developments led to the first easing of bank reserve requirement in 3 years. Specifically, inflation had dropped from 6.5% to 6.1% to 5.6%. Meanwhile, manufacturing activity may have contracted in November.

Some see the developments as the final nail in the world’s economic engine. I view China’s policy shift as a well-played step towards the proverbial soft landing. S&P China (GXC) as well as Australia (EWA), South Africa (EZA) and Chile (ECH) have surged since the¬†11/30 announcement of the lowering of requirements for bank reserves.

China Lowers Bank Reserve Requirement    
iShares MSCI South Africa (EZA)     8.2%
iShares MSCI Australia (EWA)     6.9%
SPDR S&P China (GXC)     6.6%
iShares MSCI Chile (ECH)     4.3%
SPDR S&P 500 Trust (SPY)     5.2%


Of course,¬†China’s move to boost global growth didn’t¬†happen irrespective of other worldwide developments. Many of the world’s central banks acted¬†in a coordinated effort to boost liquidity on the very same morning, offering a means by which European banks could borrow money¬†during the current liquidity crunch.

That said, few should underestimate the significance of¬†China’s actions. (Note: One month prior to China’s actual intervention, I expressed my belief that the stimulus was close at hand. Review “The Great Stimulus: China ETFs Getting Closer To¬†Lift Off.”)

Here are 3 potent reasons to get exposure to an exchange-traded China fund today (e.g., GXC, YAO, etc.):

1. P/E Ratio Below 10. ¬†¬†In the past 20 years, it has happened only 3 times — Summer of 1998, Fall of 2008, Fall of 2011. In 1998, Asia’s currency crisis and the Long-Term Capital Hedge Fund debacle created a massive exodus from Asian equities; buyers in 1998, though, were richly rewarded. In the toxic mortgage mess of 2008, the markets punished all¬†equity investments; once again, however,¬†buyers of China ETFs with P/Es below 10 were well-compensated for the risk. Similarly, one should view the¬†current valuation for SPDR S&P China at 9.9 as rather intriguing.

2. Diversification. At times, it may seem as though all stocks — foreign and domestic —¬†move in tandem. Moreover, considering the horrendous 2011 outing for emerging markets as well as European equities, many folks may feel there’s no place like home. However, the MSCI China Index has a relatively weak 5-year correlation to U.S. stocks at .65, whereas MSCI Emerging Markets is at .85 and MSCI World is at .93 with U.S. stocks. Diversifying your stock exposure actually lowers your overall risk.

3. Stimulative Environment. China’s 10-year bond at 3.6% is stimulative in and of itself. And the recent lowering of bank reserve requirements is a godsend. Truth be known, China already experienced an inflationary bear (11/2010-10/2011) with a debilitating¬†-42% bludgeoning. With many China ETFs 20% or nearly 20% off the October lows, a bull appears set to savor China’s soft economic landing.

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Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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