China: Underwhelming Data Leads To Outperformance?

Includes: EWA, EWH, EWJ, FXI
by: Emerging Money

By Sean Geary

Data over the weekend from China showed a drop in economic growth, down to 7.7% year over year for Q1 2013. However, in spite of the exchange's recent woes, the Shanghai Composite (NYSEARCA:FXI) is showing remarkable resilience.

Although many market observers expected growth to come in higher than the numbers that were reported, from a long-term perspective, these numbers aren't entirely surprising -- consistent double-digit growth was never going to be viable over the long term. This dip in GDP growth is indicative of the country -- hopefully successfully -- transitioning from a low-cost export manufacturer to an economy more reliant on services.

While these GDP numbers are not necessarily an ominous portent for the future of China -- 7%-plus growth is head and shoulders above developed world growth, and inland China still has a lot of catching up to do, development-wise. A slowdown in raw material imports could be problematic for resource-exporting nations with a lot of exposure to China. Countries like Australia (NYSEARCA:EWA) could see a material decline in the price of core commodities and a concomitant drop in overall economic growth.

After Western markets dropped overnight and gold dropped precipitously in frantic trading, it's no surprise that China opened lower to start the day Tuesday. As we've discussed quite a bit recently, the Shanghai Composite is stuck in a solid downtrend. However, there have been some signs of encouragement. For the first time in recent memory, the Shanghai Composite ended the day in positive territory, while its regional counterparts in Hong Kong (NYSEARCA:EWH) and Tokyo (NYSEARCA:EWJ) finished in the red.

Also, twice over the past two weeks, the exchange has opened below its 200-day moving average only to rally strongly back across and hold this key level in the afternoon. If the Shanghai Composite continues to hold its 200-day moving average, the exchange could finally break out of its downtrend. However, if China were to break below the 200-day moving average and close there, the exchange could move much lower.