Preparing to Buy China Again

12/23/2008 12:01 am EST

Focus: GLOBAL

Tom Lydon

Editor and Publisher, ETF Trends

Tom Lydon, editor of ETF Trends, is almost ready to step back into Chinese ETFs.

Treasury Secretary Henry M. Paulson Jr. recently met with Chinese officials to discuss the economies recently, with both China and the US pledging to spend $20 billion to help developing countries finance trade.

Investors by and large seemed disappointed, as major issues went unresolved, including efforts to open China’s financial sector to US securities firms [and the status of its currency, the yuan]. The yuan’s weakness against the dollar has contributed to a trade gap between the two countries.

China is working hard to shore up its economy, increasing its money supply by 17% in order to fire up consumer spending and looking to stabilize the capital markets through issuing more bonds, increasing insurance coverage, and supporting capital markets investments and mergers and acquisitions.

Emerging markets are struggling by varying degrees, but China demonstrates stronger potential than most to come back. It’s still a poor country, but it boasts a growing population that’s increasingly going urban. Until recently, this led to rapidly expanding skylines in Beijing and Shanghai.

But China still has more room to grow. A large portion of its $586-billion stimulus plan is allocated to the improvement of railroads, airports, utilities, and other public works.

Certain companies stand to benefit, including China Communications Construction (HK: 01800.HK), one of the largest construction companies in the country. The Chinese government is the largest shareholder, which could give the company a leg up when it comes to contracts.

China, however, needs to become less reliant on exports as it recovers. The slowdown in the rest of the world left it particularly vulnerable to cutbacks in consumer spending.

All of China’s largest ETFs have touched their 50-day moving averages in the last week or two, making them worthy of consideration in accordance with our market entry strategy.

This means we’ll get in incrementally: 25% when a fund crosses the 50-day. When it moves up 5%, we’ll invest another 25%. At that point, the 200-day moving average should be within sight.

  • iShares FTSE/Xinhua China 25 (NYSEArca: FXI), down 44.4% so far this year, but 9.8% above its 50-day moving average. This is by far the largest ETF for China, and one of the top ETFs in terms of daily trading volume and assets, with $4.9 billion.
  • SPDR S&P China (NYSEArca: GXC), down 46.6% in the year to date, but 9.6% above its 50-day moving average. It has $113.9 million in assets.

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