China ETFs: Challenges in the New Year

January 4th at 3:00pm by Tom Lydon

China steam-rolled right through 2010, but signs of overheating are starting to manifest. The government has stepped in to keep growth in check, but too much too soon is a risk China’s exchange traded funds (ETFs) will face in the new year.

China has plans to deal with its challenges, though:

  • China’s economic expansion, which is forecast to hit 9% in 2011, may bring more inflation, remarks George Magnus for Minyanville. Prices have already been steadily rising, and property price inflation will likely continue to advance because of more home transactions, despite restraints in home financing.
  • Over the Christmas weekend, the Central bank increased the benchmark deposit and lending rates by 0.25% to 2.75% and 5.81%, respectively, which will help combat the quickly rising inflation rates, writes Claus Vogt for Money and Markets. [ETFs to Watch If China’s Banks Become Insolvent.]
  • This year, the Twelfth Five Year Plan will emphasize economic rebalancing, higher wages and rural incomes, and a $1.5 trillion investment in high-end manufacturing industries, low carbon technologies and alternative energy.

China’s ETFs saw many of its struggles manifested in ETFs that lagged the market last year:

  • iShares FTSE/Xinhua China 25 (NYSEArca: FXI) gained 2% in 2010
  • SPDR S&P China (NYSEArca: GXC) gained 6.1%
  • PowerShares Golden Dragon Halter USX China (NYSEArca: PGJ) was the top performer in the broad China group, gaining 10.1%

Things to watch out for include how the country will handle the aging population as a direct result of the One Child policy and the transfer of power to new leaders in 2012.

Eunice Yoon for CNN comments on how housing prices in Beijing are almost on par with Hong Kong, food is getting pricier due to bad weather and clothing is not as cheap as it used to be. Economists believe that interest rate hikes, stricter lending practices and price controls will be coming in the near future. Nevertheless, analysts opine that the economy won’t be too hurt by the restrictions.

The bottom line really is that China has a huge export business, strong GDP and its government has so far been protective and responsible about growth. China is well aware of bubbles and wants to do what’s best to enjoy economic growth.

Whether you’re bullish or bearish on China’s efforts and maintaining growth while keeping it in check, you can also add some oomph to your exposure:

  • ProShares Short FTSE China 25 (NYSEArca: YXI)
  • ProShares UltraShort FTSE/Xinhua China 25 (NYSEArca: FXP)
  • Direxion Daily China Bear 3x Shares (NYSEAca: CZI)
  • Direxion Daily China Bull 3x Shares (NYSEArca: CZM)

For more information on China, visit our China category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.