Domestic Consumption Slowdown Hits China ETFs

Includes: FXI, GXC, MCHI, PGJ
by: Tom Lydon

Shares of Chinese companies that trade in New York or in Asia have faced major resistance as China's economy slows. Exchange traded funds that track these companies have had varied results, but could be in for more headwinds as domestic consumption wanes.

"There is growing investor concern about China's slowing economy. Earlier this week, the International Monetary Fund cut its growth forecast for China by 0.2 percentage points to 8%, and suggested a "hard landing" was still possible," Shirley Won for The Globe and Mail wrote.

Asian stock indices reacted negatively to Chinese Premier Wen Jiabao's statement that the job market would be weak due to falling profits in Chinese companies. After the latest news of 2Q GDP growth in China coming in at 7.6%, a three-year low, chances of a recovery are complex, with severe economic complications along the way, reports Associated Press.

Industries in China that rely on demand for new factories and equipment have suffered the most. Across the board, shipbuilders, airlines and retailers are seeing large drops in profit, some up to 80% in losses, reports Associated Press. Furthermore, the stress of politically favored companies is evident.

The iShares FTSE China 25 Index Fund (FXI) is in a rough position, losing 8.5% over the second quarter. The fund is concentrated in the financial service sector, with the top ten holdings accounting for two-thirds of assets. This ETF is the largest Chinese-focused ETF trading, reports Eric Dutram for Zack's.

As Chinese industrial production has slid 9.5%, the implication is that China is producing less and is impacted by the economic malaise in developed markets. Also of note, of the companies that trade shares on mainland China's two exchanges, 233 expect to report losses for the first half of 2012. About 449 expect lower profits in comparison to one year ago, reports Xinhua News.

Other Chinese-focused ETFs:

  • SPDR S&P China ETF (GXC)
  • iShares MSCI China ETF (MCHI)
  • Powershares Golden Dragon Halter USX China Portfolio ETF (PGJ)

iShares FTSE China 25 Index Fund

Tisha Guerrero contributed to this article.

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