Chinese ETFs Remain Attractive, Despite WikiLeaks

Includes: FXI, GXC, PGJ
by: Carlos X. Alexandre

We have grown accustomed to putting a little money in international funds, and finding opportunities in China is not as hard as it used to be. Through ETFs we can buy a little of the Chinese dream, and here are at least three investment vehicles that welcome our cash: iShares FTSE/Xinhua China 25 Index Fund (NYSEARCA:FXI); PowerShares Golden Dragon Halter USX China Portfolio (NASDAQ:PGJ); and SPDR S&P China (NYSEARCA:GXC).

Inflation is now the demon that ails the Chinese, and rising rates — despite the confusion among analysts as to why — is the soup-du-jour. Could it be that inflation is not the issue? Being a nation of savers, at some point the Chinese have to increase rates so that households which own the deposits earn more money, offering a counter-balance to a declining export-based economy. And we can’t forget that the banking system is fully controlled by the Politburo; thus, it’s quite simple for them to stop lending — or better yet, threaten to kill you if you raise prices.

Construction continues unabated, but according to Time magazine, and only as a small example, the Chinese town of Ordos, meant as home for one million people, remains nearly empty five years after construction began. For a while now, the economic story didn’t quite add up, the anecdotal evidence keeps pointing to some other outcome, and the "official" numbers are just that — "official"! I’ve traded the ETFs purely on a technical basis, but never dreamt of betting on China’s long-term success — especially at this juncture!

According to The Strategic Truth About Investing:

The Chinese made three major miscalculations, not to mention that they haven’t realized that the Dollars, Euros, and Yen they hold actually is not money — just IOUs. Now keep in mind that many view the economic data published by the Chinese as suspicious at best, and I’ve found plenty of discrepancies.

As an added example, there’s the issue of a decline in power consumption. According to Xue Jing, Director of Statistics for the China Electricity Council (CEC), heavy power-consuming provinces in eastern China such as Hebei, Jiangsu and Zhejiang have shown nearly zero growth in October compared with the same period last year, while western provinces such as Ningxia, Gansu, Yunnan and Guizhou have reported a year-on-year decline in power consumption. The November 2010 report predicted further that power consumption by heavy industry will decline going forward into December.

Then Reuters published an article about a Wikileaks cable and everything made sense. Below is the first part, which is enough to reveal China at its core, and I’m certain that Li Keqiang sugarcoated his candidness.

China's GDP figures are "man-made" and therefore unreliable, the man who is expected to be the country's next head of government said in 2007, according to U.S. diplomatic cables released by WikiLeaks.

Li Keqiang, head of the Communist Party in northeastern Liaoning province at the time, was unusually candid in his assessment of local economic data at a dinner with then-U.S. Ambassador to China Clark Randt, according to a confidential memo sent after the meeting and published on the WikiLeaks website.

The U.S. cable reported that Li, who is now a vice premier, focused on just three data points to evaluate Liaoning's economy: electricity consumption, rail cargo volume and bank lending.

"By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are 'for reference only,' he said smiling," the cable added.

Trading China ETFs is still a sport that I don’t mind playing, but the economic story of the century is likely to vanish before our very eyes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.