by John Nyaradi
China appears to be playing a game of "whack-a-mole" in attempt to prevent an economic slowdown and China ETFs are likely to get significant attention as a result of the problems that keep springing up all around the nation's officials. When one problem is addressed, another one erupts.
Throughout the last half of June, we had been hearing about how attempts by the People's Bank of China, aimed at getting control over the nation's "shadow banking system" (unregulated financial institutions with shoddy lending practices) escalated interbank lending rates in the nation and nearly caused a liquidity crisis. Finally, on June 28, People's Bank of China chief Zhou Xiaochuan announced that the central bank would provide guidelines on reasonable lending practices and foster lending growth while adjusting market liquidity in a manner it may deem appropriate.
July began with a report from China's National Bureau of Statistics which suggested that the nation's Manufacturing PMI was in-line with economists' expectations for a reading of 50.01, representing a decline from May's 50.8. On the other hand, the HSBC China Manufacturing PMI for June dropped to 48.2 from May's 49.2. A result below 50 indicates contraction.
On Wednesday, July 3, China's official non-manufacturing PMI fell to 53.9 in June from 54.3 in May, according to the National Bureau of Statistics and the China Federation of Logistics and Purchasing (CFLP). China's Construction PMI sank 2.9 percent to 59.3 percent in June, according to the CFLP report. Worse yet, the HSBC China Services PMI dropped into the range of contraction in June, falling to 49.8 from 50.09 in May.
On July 4, the People's Bank of China was able to resist the urge to take more money out of the financial system. As a result, the seven-day repo rate declined 0.32 percent to 3.91 percent. On July 9, the Chinese government had some bad news about inflation. Economists expected to see that consumer prices increased by 2.5 percent in June (on a year-over-year basis) compared with May's 2.1 percent increase. The actual report brought worse news: Consumer prices rose 2.7 percent. The additional inflation restricts the central bank's ability to use monetary stimulus.
On July 10, the nation's Customs Administration reported that exports sank by 3.1 percent in June on a year-over-year basis, despite expectations for a 3.7 percent advance. Imports declined 0.7 percent, despite expectations for a 6 percent increase. Nevertheless, the Shanghai Composite Index soared 2.17 percent to close at 2,008 for its biggest surge since March 20. Why? It was another example of how bad news can spark anticipated central bank intervention. In this case, Premier Li Keqiang had given a speech on the previous day, suggesting that the government's position on monetary policy may soften before the end of this year. Bad economic news was seen as a timely prompt to nudge the PBOC in the right direction.
Rumors began to circulate on July 11, suggesting that the government was planning a new stimulus program. As a result, the Shanghai Composite Index (NYSEARCA:FXI) skyrocketed 3.23 percent to close at 2,072, for its biggest 2-day rally since January of 2012.
Meanwhile, China is scheduled to release its GDP reading for the second quarter of 2013 on Sunday, July 14, 2013. Fortunately, the International Monetary Fund attempted to prepare the world in coping with reports of slower-than-expected economic growth. The World Economic Outlook Update, released by the IMF on July 9, lowered the bar on its expectations for China's economic growth. Its projection for China's annual GDP expansion for calendar year 2013 was lowered from April's estimate of 7.2 percent growth to 6.9 percent. The IMF's projection for China's annual GDP expansion in 2014 was lowered from April's estimate of 7.3 percent growth to 7.0 percent.
On July 11, Chinese Finance Minister Lou Jiwei admitted that he expects that the government will miss its 7.5 percent target for economic growth for 2013, and by the end of the year China's economic expansion rate for 2013 will be 7 percent. In an interview with Bloomberg News, he seemed even less optimistic when he said: "We don't think 6.5% or 7% will be a big problem".
Also on July 11, the Macquarie Group became the latest firm to cut its economic growth forecasts for China. Its forecast for China's economic growth in 2014 was cut to 6.9 percent. Although the Macquarie Group also cut its 2013 forecast, the change still seemed a bit optimistic, since it was lowered from 7.8 percent growth to 7.3 percent.
For investors and traders who want to seek profits from the turbulent economic changes taking place in China, various China ETFs offer opportunity for long or short positions:
- iShares FTSE China 25 Index Fund ETF (NYSEARCA:FXI) – This ETF is designed to track the FTSE China 25 Index Fund. The FTSE China 25 Index tracks the performance of the top 25 Chinese companies; each company is traded publicly on the Hong Kong Stock Exchange.
- ProShares UltraShort FTSE China 25 ETF (NYSREARCA:FXP) – This ETF is designed to obtain results which correspond to twice the inverse (-2x) of the daily performance of the FTSE China 25 Index. The fund invests in derivatives which ProShares Advisors believes, in combination, should have similar daily return characteristics as two times the inverse (-2x) of the daily return of the FTSE China 25 Index. The index is comprised of 25 of the largest and most liquid Chinese stocks listed on the Hong Kong Stock Exchange.
- iShares MSCI Hong Kong Index Fund ETF (NYSEARCA:EWH) – This ETF is designed to obtain results which correspond generally to the price and yield performance of the MSCI Hong Kong Index. The fund will at all times invest at least 80% of its assets in the securities of the MSCI Hong Kong Index.
Bottom line: China has long been seen as a savior for global growth, but now with its imports and exports both falling, it's increasingly unlikely that the dragon will be able to support global economic growth to the extent hoped for by the developed world. The question now is whether central banks will be able to offset the ongoing global slowdown, or is another global recession looming on the horizon? In any case, China ETFs will likely be on the move.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.