Markets

How China's Highest Skyscraper Curses China ETFs

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China celebrated placing the last beam atop its tallest skyscraper over the weekend. The 2,073-foot-tall Shanghai Tower hails as the world's second-highest building after the Burj Khalifa in Dubai.

The crowd may be cheering but the party is ending for the world's second-largest economy, says Ed Yardeni, president of Yardeni Research. Massive developments happened to spring up right before an economic bust in the past. Take Dubai's Burj Khalifa. It was completed in October 2009 -- two months before a massive debt crisis swept across the country.

"Based on the Skyscraper Index, China's big collapse is likely to occur just after the completion of Sky City in the southern Chinese city of Changsha," Yardeni wrote in his daily client note Wednesday. Sky City will be taller than the Burj Khalifa by 10 meters and is scheduled for completion in 2014.

China ETF Performance

China's stock market appears to have already priced in the slowdown.IShares China Large-Cap ( FXI ) has underperformed about three-quarters of global markets this year, sinking 16.5% while iSharesMSCI Emerging Markets ( EEM ) is down 13%.IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, has gained 7.59% despite Europe's recession.

FXI officially fell into a bear market June 19, when it corrected 20% from its 52-week high. Unlike the U.S. market, it was still a far cry from its 2007 apex and its 2010 high.

Among other decliners,IShares MSCI China Index ( MCHI ) is off 13% this year,SPDR S&P China ( GXC ) nearly 9%,Guggenheim China Small Cap (HAO) 3.5% andClaymore/AlphaShares China Real Estate ETF (TAO) 8%.

Several of these ETFs trade below both their 50- and 200-day lines, indicating a strong downtrend. A trend change can't be confirmed until they rise above the key 200-day average. Heavy weightings in financials dragged them down in the face of a credit crunch in June.

"The People's Bank of China's self-induced liquidity crunch in June was a surprise to many investors and has harmed confidence in China, as execution missteps may create short-term risks to well-intentioned policies that most investors believe the new leadership is making," Jefferies analysts wrote Wednesday. "Interestingly, so deep-seated is the skepticism about China's credit growth that the perception of even well-managed banks likeHSBC andStandard Chartered Bank is negatively impacted in a few investors' minds, given their rapid growth on the mainland."

The technology sector, on the other hand, managed to defy market weakness.Claymore China Technology ETF (CQQQ) surged 29% year to date.Internet-heavy PowerShares Golden Dragon China (PGJ) rallied 27%, driven byBaidu (BIDU), the country'sGoogle (GOOG);Ctrip.com International (CTRP), an online-travel booking site; andNetEase (NTES), an online-gaming site.

Both ETFs have vaulted high above their 50- and 200-day lines and appear over bought.

Slowing Economic Growth

China faces a dwindling labor force resulting from the one-child policy enacted in the late 1970s, leaving fewer workers to support more retirees. Its average of 1.6 children born to each woman undercuts the 2.1 needed to maintain the population, according to the World Bank.

Dollar-denominated exports to China from the U.S., the eurozone, the U.K., Japan, and South Korea were down 4.9% year over year through May, according to Yardeni.

"In addition, the government is attempting to reverse years of horrible environmental pollution caused by rapid industrialization over the past few decades," Yardeni wrote. "There is also a new official campaign to reduce corruption by government officials, who have been building lots of glitzy office buildings for themselves and driving luxury cars to get to work.

"This week, the government started to audit the books of all these officials in an attempt to measure how much public debt they've accumulated during their spending sprees. All these issues could come to a head just in time for the completion of Sky City."

Follow Trang Ho on Twitter @IBD_THO .

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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