China’s economy and exchange traded funds tied to the country’s equities market may be in for a hard landing as economic data takes a turn for the worse and the country faces deleveraging pressure.
China ETFs are down about 20% in 2011 with two weeks left in the year.
China’s Homelink property website revealed that new home prices in Beijing plunged 35% in November month-over-month, reports Ambrose Evans-Pritchard for the Telegraph. In August, construction firms stated that unsold inventories reached $50 billion and it has now degenerated into a “spiral of downward expectations,” Professor Patrick Chovanec from Beijing’s Tsinghua School of Economics commented. [ETF Spotlight: China Real Estate]
The country’s M2 money supply fell 12.7% in November, a 10-year low, while new lending dropped 5% month-over-month.
Meanwhile, the Shanghai Index has declined 30% since May and it is currently 60% lower from its peak back in 2008. In comparison, Wall Street experienced a similar drop back in the early years of the Great Depression. [China ETFs Hit on Weak Manufacturing Data]
“Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)… a ‘Bloody Ridiculous Investment Concept’ in my view,” Albert Edwards at Societe Generale, said in the report. “The BRICs are falling like bricks and the crises are home-blown, caused by their own boom-bust credit cycles.”
“I think it is highly likely that China will devalue the yuan next year, risking a trade war,” Edwards added.
China’s foreign reserves, which is the world’s largest at $3.2 trillion, has been steadily falling over the past three months as “hot money” is pulled from the economy.
“The reality is that China’s economy today requires significantly more financing to achieve the same level of growth as in the past,” Chinese analyst Charlene Chu said.
- iShares FTSE/Xinhua China 25 Index Fund (NYSEarca: FXI): down 18.9% year-to-date
- SPDR S&P China ETF (NYSEArca: GXC): down 18.8% year-to-date
- Guggenheim China Real Estate (NYSEArca: TAO): down 27.9% year-to-date
iShares FTSE/Xinhua China 25 Index Fund
For more information on China, visit our China category.
Max Chen contributed to this article.