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China Stock ETFs Rebound From Sell-Off: Time To Buy?

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China's stock market rebounded Tuesday from a sharp sell-off in the prior session after the government announced a hefty increase in defense and domestic security spending to support economic growth. Beijing also said it aims to maintain the country's economic expansion at 7.5% this year.

The national defense budget will be raised 10.7% to $119 billion and domestic security will be lifted 8.7% to $124 billion.

The flagship iShares FTSE China 25 ( FXI ), tracking 25 blue chip stocks, popped 0.95% after tumbling 1.76% to a three-month low the day before. It's corrected 9% from a 52-week high, which is considered a normal pullback. It's trading near a 38.25 buy point in a first-stage, cup-with-handle base from which it broke out in December.

SPDR S&P China ( GXC ) climbed 1.26%.

Market Vectors China ( PEK ) gapped up 2.7% to nearly regain its 50-day moving average, which would confirm a solid uptrend.

Guggenheim China Small Cap ( HAO ) jumped 1.4%, regaining almost all of its losses from the prior session. It's fallen only 4% from its 52-week high, which is seen as a healthy pullback in an uptrend.

Guggenheim China Real Estate ETF ( TAO ) was flat after gapping down 3.2% Monday in heavy volume. It's corrected 8% from its 52-week high, within a healthy pullback range in an uptrend, especially after it rallied a whopping 59% last year and doubled off of its 2011 bear-market low.

But its IBD Accumulation/Distribution Rating has deteriorated from a healthy B rating to E -- the lowest possible -- over the past five weeks. That shows institutional investors quickly went from heavily acquiring shares to dumping them.

All five ETFs are trading above their key 200-day moving averages, indicating they're in a weak uptrend.

Real Estate Controls

China's stock market and U.S.-traded shares plunged Monday following the government's move to cool down the red-hot real estate market. In an effort to control housing inflation and speculation, Chinese officials said Friday they will enforce a 20% capital-gains tax on profits from home sales.

They also said they would make banks require bigger down payments and charge higher mortgage rates for second-home buyers in some cities.

Leaders are worried about possible social unrest as real estate is unaffordable for the middle class. Home prices in China's 100 largest cities rose for a ninth straight month in February, Reuters reported . They rose 2.5% from the year-ago period. For the top 10 cities, home prices climbed 4.3% year over year in February.

Why Buy Chinese Stocks Now?

Some asset managers say the sell- off was overdone and expected a quick rebound.

"According to our head of China equities, the measures were not totally new, nor unexpected," Khiem Do, who is based in Hong Kong as head of Asian multi-asset strategy at Baring Asset Management, said in an email. "How the authorities will implement those rules is another issue altogether."

He recommends buying stocks outside the real estate sector that "offer steady growth at a reasonable valuation." Investors must be careful about buying property, construction and building products because some areas are overbuilt.

"There are a growing number of so-called ghost towns, empty apartments, offices and shopping centers all over China," Do wrote.

The property sector will be volatile for a few weeks as investors get clarity over what the announced measures will entail, said Michael Reynal, the new portfolio manager for RS Emerging Markets and RS Greater China funds.

At the same time, a new crop of national leaders start taking office this week. Reynal is considering buying companies with positive earnings growth that have fallen to historically cheap valuations.

China's ghost towns will fill up quickly as people from agricultural areas increasingly move to the cities, Reynald said, adding that Chinese investment demand will support property prices because investors have few other investing options.

The measures "do not seem to have affected developers' plans on new starts and completions," Barclays wrote in a client note Monday. Developers have managed to sell 60% to 80% of their apartments within two to three months of the pre-sales period.

The outlook for first-time homebuyer demand for smaller apartments remains robust, and inventories in some areas have fallen from their January 2012 peak.

"Most developers are maintaining their new starts and land purchase plans and requesting acceleration of permits from the local government for new developments," Barclays wrote.

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

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

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