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.)

Final Thoughts
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.

For a complete guide to ETFs, check out our ETF Tutorial.

Related Articles
  1. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  2. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  3. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  4. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  5. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  6. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  7. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  10. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  1. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!