The Growth Story Behind China's Economy, ETFs

by: Tom Lydon

I recently had the chance to visit Shanghai and Beijing with Frank Holmes, CEO and CIO of U.S. Global Investors (NasdaqCM: GROW), along with other fellow board members and key executives from U.S. Global. The trip really put into perspective the China growth story one always hears about but never really gets to appreciate firsthand.

After my first steps onto the street, I quickly noticed the noise and movements of the city. One only needed to take a quick look to notice the massive development projects that were taking place as the city tries to live up to the persona of a global hub.

China’s domestic growth is on the fast track. The government has poured hundreds of billions into fueling its own economy. For example, more than $300 billion has been spent on connecting Chinese cities with a high speed rail network, which will help bring millions of people closer together. Frank and I had the chance to travel through the 923-mile stretch between Shanghai and Beijing on a high speed rail train that was running at an average 185 miles per hour.

Emerging markets, like China, have “focused on their stimulus, on job creation and infrastructure development, their roads to economic growth have already been paved,” Holmes shared with me. “This will allow them to flex their economic muscles during short-term instability and insulate them from the turmoil.”

China’s economic growth has also been bolstered by domestic consumption and gross capital formation in recent years. Since exports collapsed by 40% right after the financial crisis, China has been weaning off its dependence, and recent data shows that exports have contributed very little to the overall growth, writes Frank Holmes for Forbes.

According to Asia Research and analyst Firm CLSA’s Andy Rothman, data shows that net exports made up 18% of China’s total 14.2% growth in 2007, whereas exports contributed to a minus 0.7% to China’s 9.6% economic expansion during the first half of the year – a negative current account would indicate higher imports compared to exports.

On our trip, we glimpsed at the beginnings of a rising middle-income population. In turn, the income growth has helped fuel the rise in domestic consumption. According to CEBM China Research, China’s GDP per capita has hit $4,000 – at this level, the middle class will begin to demand goods that improve their quality-of-life. CLSA research shows that inflation-adjusted wages in urban areas jumped 7.8% in 2010 and have already risen 7.6% during the first half of the year. Urban retail sales and household expenditures have vaulted 17.4% and 12% in the second quarter, respectively. CEBM also notes that the retail sector in China is estimated to expand 35% for 2011, with sales expected to jump 18% year-over-year, as the growing middle class consumes more goods.

The ISI group calculated that retail sales rose 17% year-over-year in August, and the firm believes the “work, earn, consume” mindset that China has been adopting will further fuel the demand for luxury goods. A large tax burden, though, has been placed on the luxury goods market, sometimes upward of 50%, but the wealthy and affluent have taken the tax hike in stride as the higher prices only augmented the goods’ status appeal.

Fixed asset investment is still averaging around 23% to 25%. The copious investments have been a key driver in industrial activity, which in turn has helped drive demand for basic commodities and raw materials. CLSA data reveals that activity in the manufacturing sector has increased 32% year-to-date, which has helped generate a 28% rise in profits for industrial firms year-over-year.

At the World Economic Forum’s annual meeting in Dalian, Chinese Premier Wen Jiabao expressed his confidence in Chinese growth and enticed investors to look to China as an opportune investment locale, according to Xinhuanet.

“I am confident that China’s economy will grow over a longer period of time, at a higher level and with better quality and make new contribution to robust, sustainable and balanced growth of the global economy,” Wen stated. “We sincerely welcome foreign companies to actively involve themselves in China’s reform and opening up process and share the opportunities and benefits of China’s prosperity and progress.”

While foreign direct investments slowed during the first eight months of 2011 from the same period a year ago, economists remain optimistic, given China’s high growth rate, reports Chris Buckley for Reuters.

“Things are still not as bad as 2008 and we don’t have that kind of liquidity crunch around the globe like last time,” Wei Yao, economist at Societe Generale, said. “China’s overall economic growth is still a very big comparative advantage … so this is still the major attraction.”

U.S. Global Investors offers investors exposure to China’s growth through its China Region Fund (USCOX).

Alternatively, exchange traded fund investors may opt for other investment options that focus on China, including these ETFs:

  • iShares FTSE/Xinhua China 25 Index Fund (NYSEArca: FXI)
  • SPDR S&P China ETF (NYSEArca: GXC)
  • PowerShares Golden Dragon Halter USX China Portfolio (NYSEArca: PGJ)
  • iShares FTSE China (HK Listed) Index Fund (NYSEArca: TCHI)
  • Guggenheim China All-Cap ETF (NYSEArca: YAO)
  • Market Vectors China ETF (NYSEArca: PEK)
  • iShares MSCI China ETF (NYSEArca: MCHI)
  • First Trust China AlphaDEX ETF (NYSEArca: FCA)

China small-cap ETFs include:

  • iShares MSCI China Small Cap Index Fund (NYSEArca: ECNS)
  • Guggenheim China Small Cap ETF (NYSEArca: HAQ)

China sector-themed ETFs include:

  • Global X China Consumer ETF (NYSEArca: CHIQ)
  • Guggenheim China Technology ETF (NYSEArca: CQQQ)
  • Guggenheim China Real Estate ETF (NYSEArca: TAO)
  • EGShares China Infrastructure (NYSEArca: CHXX)
  • Global X China Technology ETF (NYSEArca: CHIB)
  • Global X China Energy ETF (NYSEArca: CHIE)
  • Global X China Financials ETF (NYSEArca: CHIX)
  • Global X China Industrials ETF (NYSEArca: CHII)
  • Global X China Materials ETF (NYSEArca: CHIM)

Inverse/leveraged options include:

  • ProShares UltraShort FTSE/Xinhua China 25 (NYSEArca: FXP)
  • ProShares Ultra FTSE/Xinhua China 25 (NYSEArca: XXP)
  • ProShares Short FTSE/Xinhua China 25 (NYSEArca: YXI)
  • Direxion Daily China Bear 3x Shares (NYSEArca: CZI)
  • Direxion Daily China Bull 3x Shares (NYSEArca: CZM)

Full disclosure: Tom Lydon is a board member of U.S. Global Investors (GROW).