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ETF's To Ride China's Economic Growth Boom

Stock-Markets / China Stocks Nov 17, 2010 - 07:46 AM GMT

By: Tony_Sagami


Best Financial Markets Analysis ArticleThe political and financial leaders from the world’s 20 largest economies, or Group of 20, gathered in Seoul, Korea last week to solve all the world’s economic problems.

Well, at least they think they can but that is the foolish arrogance of all politicians who think that government policy is more effective than free markets. Not much happens at these G-20 meetings, and this one was no different. There was a lot of finger pointing and tough talking, however, and most of it was directed at China from our White House.

Treasury Secretary Geithner and President Obama have been complaining for China to let its yuan appreciate. The current administration seems to think that forcing China to push its currency higher will solve all of the United States’ economic woes.

The G-20

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together industrialized and developing economies to discuss key issues in the global economy.

The G-20 is made up of the finance ministers and central bank governors of 19 countries and the European Union: Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, and the United States.

Not only are Obama and Geithner wrong, the Chinese really don’t give a darn what they think. In fact, the Chinese are getting pretty sick and tired of getting blamed for U.S. economic problems and think that the United States needs to show some monetary restraint.

“Don’t make other people take the medicine for your disease. Quantitative easing will have a very big impact on developing countries including China,” said Yu Jianhua, the director general at China’s Ministry of Commerce.

China has a point. Like the boy who cried wolf, the rest of the world doesn’t want to take economic advice from a country that is printing money, spending money, and building deficits big enough to choke a dinosaur.

Plus, why is it that you never hear the White House complain about the big trade surplus numbers that Germany, which hit $23.5 BILLION in October, and Saudi Arabia run with the United States?

The reality is that the Chinese economy is booming, and our leaders should be taking lessons from them instead of telling them what to do.

China’s Two Economies

China has two very different economies. The first is the export-driven manufacturing economy; the other is the domestic consumption-driven economy.

China’s economic resurgence from the poverty of communism has been fueled by its low-wage, low-cost factories turning out the items that fill the shelves of stores like Wal-Mart, Toys R Us, and Target.

Thanks to the success of China’s manufacturing center, Chinese incomes have risen and created a balloon of middle class consumers with money to spend. This domestic demand was initially the icing on China’s economic cake, but it also came to replace the manufacturing business from the global recession.

Rising incomes in China have created middle class consumers with money to spend.
Rising incomes in China have created middle class consumers with money to spend.

The newest data shows that China’s manufacturing sector is revving up. That tells me that China is headed back to its 10%-plus growth rate.

Clue #1: The October trade numbers show that China ran a $36 billion trade surplus in October. China has been running $20 billion monthly surpluses for years, so $36 billion is bigger than usual. That is clue #1 that the manufacturing sector is quietly enjoying a return to its glory days.

Clue #2: China’s exports increased by 22.9% from the same period a year ago. This impressive growth doesn’t mean that the global recession is gone for good, but it shows that the world still wants a whole lot of whatever China is making.

Clue #3: Imports rose by 25.3%. That number is pretty darn impressive because import numbers can be greatly skewed by oil prices. Since oil was much higher 12 months ago, this import increase means that China is buying/importing products that are bought by Chinese consumers.

This tells me:

  1. The rebound in exports/manufacturing gives China’s leaders the flexibility to permit their currency to appreciate a little bit. China does not want to clobber its exporters by making their products more expensive to overseas buyers unless the underlying business is strong enough. Currency funds/ETFs, such as the WisdomTree Dreyfus Chinese Yuan Fund (CYB) will profit from an appreciating yuan, and the Merk Hard Currency fund (MERKX) will profit from a falling dollar.

DISCLOSURE: My Asia Stock Alert subscribers already own CYB and MERKX and are sitting on some handsome profits.

  1. The more important takeaway is that the combination of booming exports and a strong domestic economy foretells a return to the 10%-plus economic growth rates that China enjoyed last decade. That was also the decade when Chinese stocks SKYROCKETED!

By the way, Chinese real estate prices increased by an average of 0.2% in October on the heels of a 0.5% increase in September. I’ve been telling you for years that fears of a Chinese real estate bubble were unwarranted.

What we’re looking at is a country with (a) a thriving export/manufacturing sector, (b) a vibrant consumer-spurred domestic economy, and (c) a resilient real estate market with slow, steady growth.

That is a country you want to invest in. The easiest way is through exchange traded funds, and there are three that will give you instant and wide exposure to China.

iShares FTSE/Xinhua China 25 Index (FXI): Seeks to track the performance of the FTSE/Xinhua China 25 index. This index consists of the largest 25 Chinese companies listed on the Hong Kong Stock Exchange.

PowerShares Golden Dragon Halter USX China (PGJ): Seeks results that correspond to the returns of the Halter USX China index. This index consists of 103 Chinese companies whose common stock is publicly traded in the United States. The index uses a formula that prevents the largest market-cap companies from becoming too large a component of the index.

SPDR S&P China (GXC): Seeks to replicate the total return performance of the S&P/Citigroup BMI China index. This index consists of the largest 342 companies that are publicly traded and domiciled in China.

Don’t make the mistake of being under-invested in China because that is where the biggest stock market profits will be made.

Best wishes,


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18 Nov 10, 04:24

why no word is written about tremendous capital misallocations like real estate (huge bubble)? Chinese story has been all played 2 years ago. emerging markets and commodities bubbles are set to burst. time to get bullish was 2 yrs ago, now it's about time to be bearish.

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