3 Reasons to Approach China ETFs With Caution | ETF Trends

China and its exchange traded funds (ETFs) have stalled somewhat in the momentum built up in the second half of 2009, but don’t let that get you down. There’s still plenty happening in the economy to pique investor interest – with caution.

China’s economy is a powerhouse, no question:

  • China’s GDP grew 11.9% in the first quarter.
  • Inflation has remained at a low 2.2%.
  • Lending has practically doubled in Beijing.

On the problematic side are three things:

  • China’s many state-owned companies have long concerned investors. State investment now accounts for 95% of the country’s growth. That increased investment has led to further growth of the “state sector,” which has decreased consumption in the Chinese economy. Consumption now accounts for less than 30% of GDP, says Gordon Chang for Forbes. Exports used to fuel China’s expansion, but now they account for about 38% of GDP. [How to Pick an Emerging Market ETF.]
  • You don’t hear people mention the Chinese real estate market without uttering the “B” word – that’s bubble. Most of China’s policy moves in the last few weeks have been focused on cooling off this heating market, says Andrew Batson for The Wall Street Journal.
  • That growth is fantastic, but it may be a little too fast. How fast, though, is still in question. After all, the 11.9% growth rate was in comparison to numbers a year earlier when the world was seemingly in meltdown mode. And the numbers show that the explosive growth came even as the government ended various fiscal stimulus measures.

Michael Zhuang for Morningstar reports that the future of China’s yuan is also in question.  The G20 nations have convened and so far, the calls for strengthening the yuan have been more like little yelps. Some are urging not to pressure China; others want to see the yuan strengthened. [Will Taiwan prosper from China’s trade deal?]

Do the concerns mean you should steer clear of China-focused ETFs? Not necessarily. Many of them are above their long-term trend lines, meaning that a potential sustained uptrend is in place. If you want to include China in your portfolio, be sure you’re managing risk by having a stop loss at the ready. [Why Bother Having a Stop Loss?]

For more stories about China, visit our China category.

  • SPDR S&P China (NYSEArca: GXC)
  • Claymore/AlphaShares China All-Cap (NYSEArca: YAO)
  • Claymore/AlphaShares Small Cap (NYSEArca: HAO)
  • PowerShares USX Golden Dragon Halter (NYSEArca: PGJ)
  • iShares FTSE/Xinhua China 25 (NYSEArca: FXI)
  • iShares MSCI Hong Kong Index (NYSEArca: EWH)
  • Claymore/AlphaShares China Real Estate (NYSEArca: TAO)
  • Claymore China Technology ETF (NYSEARca: CQQQ)
  • Global X China Technology (NYSEArca: CHIB)
  • Global X China Consumer ETF (NYSEArca: CHIQ)
  • Global X China Industrials ETF (NYSEArca: CHII)
  • Global X China Financial (NYSEArca: CHIX)
  • Global X China Energy (NYSEArca: CHIE)
  • Emerging Global Shares China Infrastructure (NYSEArca: CHXX)ww

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.