China ETF Battle: FXI vs. FXP

The battle between China ETFs such as (FXI) and the ProShares Ultra Inverse China ETF (FXP) has been an interesting one with wide swings during the past year. FXI is up about 40% from its low but FXP is still substantially ahead on a year-to-date basis. Which approach will win out in 2009?

Chinese economic growth is declining rapidly. Exports fell in November for the first time in almost seven years. With demand in many of its main markets slowing sharply, Chinese exports declined 2.2 per cent from a year earlier. Imports also fell 17.9% from a year earlier, according to Chinese customs figures, prompting the government to announce plans to further boost the economy.

About 2/3 of toy exporters have already gone bust this year and orders from foreign buyers and overall orders from foreign buyers have fallen off a cliff. More importantly, investment, which makes up about 50% of China’s GDP is declining. Foreigners are investing and buying less: November foreign direct investment fell by a third from the previous year. Deflation is even a possibility, with annual producer price inflation plunging to 2% in November, less than one-third the October reading.

Despite all this bad news, China bulls have taken heart from beaten down valuations and the recent actions by China’s mandarins. Interest rates and bank reserve requirements have been cut, infrastructure spending announced export tax rebates and China’s currency has even come back a bit in a bid to help exporters. China’s chief worry is about unemployment, capital flight, political turmoil and deflation. The near-term headline news will not be pretty.

Comments

[NOWHEREMAN:]

What really matters is the reaction to the bad news not the news itself. Somewhere in the last few weeks, the market no longer uses bad news to go down, it instead anticipates what the reaction of the Gov. to the bad news will be. And investment proceeds accordingly.

2008 Dec 16 04:48 AM