The Chinese government is hoping that a $586 billion stimulus plan will be
able to kick-start its economy.
Despite the International Monetary Fund forecasting China’s GDP growth to
finish in a healthy range of 8% to 10% in both 2008 and 2009, the Shanghai
Composite Index has been punished along with the rest of major global exchanges
this year. The index has lost nearly two-thirds of its value since the beginning
of the year.
The iShares FTSE/Xinhua China 25 Index (FXI), an ETF that
tracks 25 of China’s largest companies, has been thrown for a 54.4% loss
year-to-date. The fund has top holdings that include names such as China
Mobile (CHL), PetroChina (PTR), China Life
Insurance (LFC) China Petroleum & Chemical (SNP)
and CNOOC (CEO).
It will be interesting to see how the announcement of the stimulus plan will
impact Chinese equities in the coming weeks. These beaten-down stocks have been
stirring interest in recent days as bargain hunters have been looking for value.
On Friday, FXI surged 12.8% on almost double its average volume. The fund is up
26.8% since October 24th. As of Friday’s close, the fund was yielding 3.8% and
wielded a P/E ratio of 10.8.
The Chinese stimulus plan which was announced on Sunday includes provisions
for spending on housing, infrastructure, agriculture and health care in China.
Infrastructure spending has been at the heart of China’s explosive growth over
the past three decades. During that timeframe, infrastructure spending has
increased annually by an average of 20%.
For investors who do think that this stimulus package will be successful in
breathing life into Chinese equities, using FXI would be one way to go. This ETF
play provides exposure to China while mitigating company-specific risk.
One point to keep in mind with FXI is the notion that a number of its
holdings are government-owned entities. While some of these companies have
prospered in the past, investors might be better served by investing in Chinese
companies that are driven solely by sound business practices and are less prone
to having national interests guide or influence the direction of the
business.
Sticking with ETFs, there are a couple of other ways to play China. There is
the Claymore/AlphaShares China Small Cap ETF (HAO) and the
Claymore/AlphaShares China Real Estate ETF
(TAO) which have both been trading for about 10 months now. Top
holdings of these funds include names such as Sohu.com (SOHU),
Netease.com (NTES), China Medical Technologies
(CMED) and E-House China Holdings (EJ).
Part of the motivation behind the launch of HAO was the tendency of small
Chinese companies to have less government ownership and be less in financial
services and more into consumer plays. TAO gives investors the opportunity to
make a focused bet on Chinese real estate. Unfortunately, both of these ETFs
have suffered fates similar to that of FXI in 2008. Year-to-date, HAO and TAO
are down 52.8% and 62.4% respectively.
A Bearish Sentiment
Whether or not China’s stimulus package ultimately proves to be effective, it
will likely be a few quarters before the plan is able to produce a notable
impact. In the meantime, there is likely to be continued volatility in the
Chinese markets with the potential for more downside risk.
There is ample opportunity to bet against China in the ETF arena. Aside from
selling any above ETFs short, there is the UltraShort FTSE/Xinhua China
25 ProShares Fund (FXP) which seeks to provide a return for investors
that is equal to twice the inverse of the daily performance of the FTSE/Xinhua
China 25 Index. FXP has seen an average of 2.4 million shares traded on a daily
basis over the past 3 months.
