Economic Slowdown Threatens to Push China ETF to 2009 Lows
March 14th, 2014 at 9:30am by Tom Lydon
China’s economy is slowing as the country implements ongoing economic reforms. Consequently, the weaker-than-expected economic activity has shaken some investors’ faith in China-related exchange traded funds.
The iShares China Large-Cap ETF (NYSEArca: FXI) has declined 11.5% year-to-date, trading around $33 per share. If more weaker-than-expected data comes out of Beijing, some fear that FXI could dip below $30, lows not seen since May 2009 during the Great Recession.
Barclays Capital’s top Asian economist, Jian Chang, lowered China’s GDP forecast to 7.3% from 7.4% due to the poor January and February data in what he called the “impossible task of pushing for reform” while maintaining sustainable growth, reports Kenneth Rapoza for Forbes.
For instance, February exports declined 18%, compared to expectations of a 7.5% increase. Industrial production for the first two months of the year increased 8.6%, compared to forecasts for 9.5%. Retail sales over the first two months gained 11.8%, compared to a 13.5% anticipated rise.
China is currently implementing economic reforms, including reducing overcapacity and controlling pollution, breaking down corruption, enacting austerity measures to curb spending, and increasing transparency in shadow banking. [Not All China ETFs are Losing Cash]
“We have argued that reforms tend to slow growth in the near term before its longer-term benefits start to be felt,” Chang said in a note. “Investors we’ve spoken with agreed that the government should be realistic and tolerate lower growth during this transition period.”
To combat the slowing growth over the short-term, Premier Li Keqiang stated that the government will focus on increasing spending on projects like social housing, rural infrastructure, major irrigation and other infrastructure programs, among others. Additionally, the central bank is expected to ease liquidity and keep rates low to help promote growth.
iShares China Large-Cap ETF
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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.