China ETFs moved upward with the market Monday, rising on the strength of actions taken by the U.S. and other nations to stem the current economic downturn. With threats of a recession still looming and a slowing forecast growth rate for China's GDP, investors with long time horizons may want to consider the following before writing off or diving into China funds. (For related reading, see Finding Fortune In Foreign-Stock ETFs.)
Synchronized Rate Reduction
The coordinated interest rate cuts by the world's major banks including the European Central Bank, the Federal Reserve, the Bank of England and the Central Banks of Canada and Sweden were followed days later by an interest rate cut by China's central bank. The hope behind the move is to encourage businesses to grow with lower interest rates from borrowed capital.
China ETF Movement
The SPDR S&P China (AMEX:GXC), the PowerShares Golden Dragon Halter USX China (AMEX:PGJ) and the iShares FTSE/Xinhua China 25 Index (NYSE:FXI) were each up 9.2%, 9.6%, and 9.7% respectively before noon on the strength of the global attempt to revitalize business activity. By end of day they were up 19.27%, 16.59%, 20.27% respectively. From the beginning of the year up until the Friday, October 10, close, PGJ is down the most among the group mentioned having lost 55.8% of is value while the FXI lost 53.6% and GXC dropped 53.3%.
Focus on the China 25 Index
The iShares FTSE/Xinhua China 25 Index ETF's largest holdings include: China Mobile (NYSE:CHL), China Life Insurance (NYSE:LFC) and PetroChina (NYSE:PTR) - all responded positively to the opportunity to access capital at lower interest rates. China Mobile, a major component of each of the China focused ETFs mentioned above, closed Monday up 18.4% while China Life Insurance and PetroChina were each up 16.6% and 13.8%.
Slowing GDP Forecast
GDP has appeared unstoppable for most of the first half of the year as China has focused on building its infrastructure to support the movement of migrant farmers into already crowded cities. Real GDP in China is forecast to fall from the 11.9% range in 2007 to 8.2% by 2012, according to The Economist Intelligence Unit's CountryData. While concerns over consumer confidence are a factor contributing to the slowdown, China also has social issues related to its strained relationship with Taiwan and its lack of land rights which could lead to tensions with its rural population. (For more on how investors can use consumer confidence, check out Consumer Confidence: A Killer Statistic.)
Investing in overseas markets carries additional risk related to political instability, social conflict and currency fluctuation that should be taken into consideration. The rate cuts by the world's leading financial banks are a sign of a concerted effort to improve the global economy. The improvements will take time to take effect, which can benefit long term investors focused on China or other emerging markets.
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