China - the world's second largest economy - recorded a very
slow pace of growth in 2012, far below what the red hot economy
had been seeing in many years past. Exports from the country,
which play a vital role in the nation's economic growth
trajectory, had been a major worry point as European woes and a
slow recovery in the U.S. led to weak demand for Chinese
Additionally, a leadership transition, higher inflation
levels and lower global demand for goods impacted the economic
health of the once rapidly growing nation of the world (
China ETF Investing 101
Fortunately though, with the global economy regaining strength
and U.S. economy showing growth momentum, China may show some
improvement in growth albeit at a slower rate.
Moreover, the Chinese government labored hard to boost
domestic demand to set off the declining demand for Chinese goods
the world over. The efforts were seen to be working well in
recent months as many now believe that China is back on
However, recent economic data and weakness in the Chinese
stock market tell a completely different story. China's stock
market plummeted to a three-month low last week as various
economic data points revealed that the economy may be losing
Do ETFs Suggest that the China Panic is Over?
China's inflation rose further in February attributable to the
rise in food prices. Additionally, industrial production data
disappointed the market with slowing numbers. Industrial
production, which was expected to marginally beat the December
growth of 10.3%, came in at 9.9% for the January-February
Also adding to the grievances of the weak economy was some
unconvincing retail sales growth. Retail sales growth moderated
to a two-year low of 12.3%. This came in much lower than the
expectation of 15.2%.
While any one of these data points may be forgivable in
isolation, together they paint a less rosy view of the national
economy. This has helped to temper some of the optimism over the
area, and push Chinese stocks to lower levels.
In these circumstances,
tracking the region are unsurprisingly on a downward trajectory.
FTSE China 25 Index Fund (
, the most popular fund in the family of ETFs providing exposure
to the Chinese equity market, has lost 7.44% in the year-to-date
period indicating the weakness in the economy since the start of
the year (
The Right and Wrong Ways to Invest in China
In fact, FXI turned out to be a major disappointed last week
as the ETF registered a fall of a massive 4.91% in the last
week's trading session on weak economic data.
FXI otherwise appears to be one of the most well accepted
choices in the family of emerging market ETFs as indicated by its
trading volume of more than 17 million shares a day. The fund,
which has a large cap tilt, manages an asset base of $7
Although the fund is one of the most popular choices to tap
the Chinese economy the scope of investment is limited to just 26
stocks. Also, the fund is biased towards the top ten holdings, as
more than 60% of the asset base goes towards them.
Among individual holdings, China Mobile, China Construction
Bank and Industrial and Commercial Bank of China take the top
three positions. For investment in the fund, FXI charges a fee of
72 basis points from investors.
For sector holdings, the fund relies too much on the
financial sector of the economy (
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). The fund assigns 58.46% to the financial sector with
double-digit allocation also made to the telecommunication and
oil & gas sectors.
This is a very important time for China, and for Chinese ETFs.
The economy is potentially facing a turning point and some strong
data will be need to pull the country out of its current malaise
and reaffirm the nation as one of the world's best growth
Strength in the developed world will certainly be necessary
for this, so investors should look to Europe and America for
clues. Beyond that, China will definitely need to rebalance its
economy further, so a focus on the Chinese consumer could also be
key for this nation's ETFs in 2013.
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ISHARS-FT CH25 (FXI): ETF Research Reports
GUGG-CHINA SC (HAO): ETF Research Reports
GUGG-CHINA RE (TAO): ETF Research Reports
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