ETFs that Track Chinese Government Decision-Making

Includes: BRF, CYB, HAO
by: Gary Gordon

Warren Buffett has a stake in the Chinese electric/hybrid car company, BYD. Jim Rogers is a bull in a China shop. And it’s no secret to my readers that I’ve lived in Southeast Asia, where I developed a number of biases towards the potential for Chinese companies.

Some recent examples include:

1. “Should You Be Buying What China Buys?”

2. In a mid-July TV interview that I had with Fox Business News, I focused on the China-heavy, SPDR Emerging Asia Pacific Fund (NYSEARCA:GMF).

3. And in one of the most soul-searching, “if-push-came-to-shove” pieces, I wrote, “Would I Rather Invest In China ETFs or U.S. ETFs?”

In truth, I think investors need to pay attention to what the Chinese government says as well as what it does. In the case of China, both words as well as actions tend to have market-moving implications.

Here are two September decisions that China’s government has undertaken. Moreover, I have highlighted a number of ETFs that might benefit from these pursuits.

1. Internationalizing the yuan. China is selling government bonds that are comparable to U.S. treasuries in its own currency, the yuan, in a Hong Kong exchange sale set for 9/28. The $6 billion yuan is close to a $900 million U.S. value.

With 3/4 of the Chinese government’s foreign reserves in dollar-denominated assets, Beijing has been losing purchasing power due to the U.S dollar’s devaluation on the world stage. Although the size of the yuan-denominated bond sale is small compared to similar auctions of U.S. treasury debt, the goal to internationalize the yuan is unmistakable. And this doesn’t even take into account an increase in requests by the Chinese government to transact business in its own currency.

If you believe that King U.S. dollar is losing its touch, there are a number of ETFs for a weakening U.S. dollar. Yet if you just want a position in China’s currency, the WisdomTree Yuan (NYSEARCA:CYB) is a good place to start.

2. Rare Earth Metal Domination. China is believed to have more than 92%-97% of the world’s rare earth metals. The names of those metals may not be familiar to most of us – dysprosium, terbium, neodymium and more. Yet China is now thinking about banning exports of certain rare earth metals.

Only 2 things could happen here… neither of them good for the world at large. One, the prices on these metals could rise astronomically. Two, a Chinese effective monopoly may mean products that use these materials would be rendered useless outside of China.

U.S. consumers may want to “go green,” and we may love the Prius alongside a number of hybrids on the road. Yet the aforementioned metals are essential to green tech like the power system of the Prius as well as wind technology.

With worldwide demand for 15 or more “rare earths” expected to seriously outpace supply, and without a clear path to investing in them, how might you benefit? If you’re finding it hard to get in on the right commodity fund or specific rare earth metal miner, is there a sensible investment for ETF investors?

Actually, there is. Consider the reality that 60% of all rare earth metal consumption is coming directly from Chinese citizens; it follows that the middle class Chinese consumer is buying electric/hybrid cars from Chinese automaker BYD as well as consuming the energy from wind turbines. The best investment to focus on the strength of the Chinese consumer is the Claymore/AlphaShares China Small Cap Index Fund (NYSEARCA:HAO).

Small cap funds like Brazil Small Cap (NYSEARCA:BRF) and China Small Cap (HAO) focus on the domestic, local economies and not the exporting big boys. These ETFs are tailored to the growth and consumption patterns of the middle class. (Again, China is consuming 60% of those rare earth metals.)

Car company BYD is one of the top holdings of the China Small Cap Fund (HAO). Moreover, 21% of the fund is committed to consumer companies while another 22% is allocated to local-economy-dependent industrials.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.