China Equity ETFs: Crouching Tired Hidden Danger


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China stock ETF investors have endured mild wounds this year that are expected only to deepen as the formerly unstoppable Asian Tiger grapples with economic dangers.

IShares China Large-Cap ETF ( FXI ), the flagship China ETF with $4.8 billion in assets, is down 10% year to date and 7% in the past 12 months. It has lagged all major global stock market indexes.

Though FXI has rallied 6% from the eight-month low it set March 20, it has yet to overcome resistance at its 10-week line.

Investors took $300 million from FXI in the week ended March 19, according to Lipper. It was the third-largest net redemption among ETFs after much larger iShares MSCI Emerging Markets ( EEM ) andFinancial Select Sector SPDR ( XLF ).

Its benchmark, EEM, fell 6% and 7% in the same periods. SPDR S&P 500 ( SPY ) is up 0.2% year to date and 19% in the past year.IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, is down 3% this year but up 10% the past year.

Db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR), tracking a share class reserved for mainland citizens, is down 10% this year. It has gathered $144 million in assets under management since it debuted in November.

Among the scarce few to defy China's stock market sell-off,KraneShares CSI China Internet (KWEB) is up 9% year to date, but 14% off its March 7 peak and Global X China Technology (QQQC), is up 2% this year but 10% off its peak.

Factory activity in the People's Republic as measured by the HSBC Flash China Manufacturing PMI (released March 24) slowed to an eight-month low of 48.1 in March, slightly below analysts' forecasts. Readings below 50 show weakening in the manufacturing sector; readings above 50 show expansion.

The Flash China Manufacturing Output Index read 47.3 in March, marking an 18-month low. The data suggest China's growth and domestic demand have weakened further, says Qu Hongbin, an economist at HSBC. Beijing will likely take measures to stabilize economic growth, such as lowering interest rates and spending money on subways, public housing, air cleaning and lowering barriers for private investments.

China's economy is starting to show cracks all over. Growth in industrial output rose 8.6% year over year in January--February, its slowest rate since April 2009. Real fixed investment and retail sales have also missed expectations. Falling iron ore and copper prices reflect the stresses to China's economy, Srinivas Thiruvadanthai, an economist with the Jerome Levy Forecasting Center in Mount Kisco, N.Y., wrote in a March 19 report.

Several investment banks have cut their outlooks for China's economic growth.

"Downside risks to China's outlook are significant, as the government grapples with rising debt levels, a surge in shadow banking activity, and substantial overcapacity in some sectors," IHS Global Insight economists wrote in a note March 20.

The government, corporations and investors have borrowed so excessively to overbuild and overproduce to achieve breakneck expansion that the world's second-largest economy is now on the brink of collapse, some economists say.

China's total credit has surged since late 2008 from $9 trillion to $23 trillion, or 250% of gross domestic product, Harry Dent, founder of Dent Research in Delray Beach, Fla., noted in his Survive & Prosper newsletter  Thursday.

"The China bubble is going to blow up and when it does, the country's economy and market will fall over like a dead elephant," Dent added. "There is no chance of a soft landing here."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: FXI , EEM , XLF , SPY , EFA

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