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 (NYSE: FXI, Stock Forum), 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 (NYSE: CHL, Stock Forum), PetroChina (NYSE: PTR, Stock Forum), China Life Insurance (NYSE: LFC, Stock Forum) China Petroleum & Chemical (NYSE: SNP, Stock Forum) and CNOOC (NYSE: CEO, Stock Forum).
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 24. 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 (NYSE: HAO, Stock Forum) and the Claymore/AlphaShares China Real EstateETF (NYSE: TAO, Stock Forum) which has both been trading for about 10 months now. Top holdings of these funds include names such as Sohu.com (NASDAQ: SOHU, Stock Forum), Netease.com (NASDAQ: NTES, Stock Forum), China Medical Technologies (NASDAQ: CMED, Stock Forum) and E-House China Holdings (NYSE: EJ, Stock Forum).
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 (NYSE: FXP, Stock Forum), 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 three months.