Trading China's Economy: China ETFs In Focus

There have been ongoing worries that the Chinese economy is contracting based on recent economic data indicating a manufacturing slowdown. Further reports of the governments desire and attempts to cool property speculation have been ubiquitous. With regards to the latter, the government has been steadily raising bank reserve requirements in an attempt to moderate speculation.

On May 2nd, 2012 the government announced an improvement in a manufacturing report for PMI (Purchasing Managers Index). It rose modestly from 49.1 to 49.3 reversing an ongoing slide if only slightly. The meager rise didn’t stop bulls from rallying stocks including Hong Kong (1%) and the Shanghai CSI 300 Index (2.18%) in an obvious short squeeze.

In the U.S., you may trade both the iShares Hong Kong ETF (EWH) and the more recently issued Van Eck China ETF (PEK), which is linked to the CSI 300 Index. However, with the latter, it has been trading at a premium to the index owing to limitations the Chinese government has over foreign investors.

To work around this until restraints are removed (and this has been happening lately) Van Eck has an arrangement with Credit Suisse to use a note issued by the bank (a derivative) as exposure to the CSI 300 Index. This has created a premium for PEK, which is beginning to dwindle (now at just over 2%). Nevertheless this has led investors to stand aside from PEK given recent troubles Credit Suisse had with TVIX which were unique from its relationship with PEK.

The bottom line is we’ve been following the Shanghai CSI 300 Index for several years and are patiently waiting to trade it once liquidity improves (currently trading less than 2K shares per day).

More conventional approaches beyond EWH and PEK have been SPDR China ETF (GXC) and the most popular FTSE Xinhua 25 ETF (FXI).



Below is our internal chart of the Shanghai CSI 300 Index from a “monthly” view. Annotations include a variety of moving averages and DeMark sequential counts.




Disclosure: Long EWH.