Chinese stock indexes and exchange traded funds have been languishing on concerns the economy may be facing a hard landing.
The closely watched China Shanghai Composite Index is sitting near its lowest level in over a year amid talk the central bank may cut lenders’ reserve requirements “to boost lending to small companies hurt by a cash crunch,” Bloomberg reported.
“Every time the stocks fall considerably, there’s speculation there’ll be reserve-ratio cuts,” said Zhang Gang, a strategist at Central China Securities Holdings Co., in the Bloomberg story. “The weekend’s here and there’s always the optimism it may happen. Such a rebound may not last unless the cut really happens.”
Investors are also worried that China’s real estate market could weaken after a credit boom.
The Chinese economy has been slowing down from its breakneck speeds, and some observers believe that China’s market is due for a severe correction. On the other hand, Chinese assets and related ETFs may only be stuck in a temporary lull, as fund managers believe.
Both the iShares FTSE/Xinhua China 25 Index Fund (NYSEarca: FXI) and SPDR S&P China ETF (NYSEArca: GXC) are down a little over 18% for the past year.
Fund managers say speculation that China is in for a hard landing are overblown, Gregg Wolper, senior mutual-fund analyst at Morningstar, says. A hard landing refers to the belief that China’s economy may head into a full blown recession. [China ETFs Struggle on ‘Hard Landing’ Fears]
Still, managers expect the Chinese economy to slow due to the government’s actions on cooling the market.
“We believe that demand from China will continue to heavily influence emerging market performance, and that a hard landing is less likely now that China’s growth rate has moderated to a more sustainable level,” according to Lazard Asset Management’s fourth quarter outlook in 2011.
However, China’s financial sector may be a cause for concern. The managers of the Matthews Pacific Tiger fund underweight Chinese financials because of greater activity in the “gray loan” area and “shadow banking” sector outside of the normal banking system.
Rajiv Jain of the Virtus Foreign Opportunities fund does not have a high opinion of Chinese banks’ management or accounting practices. He is also concerned that the government’s attempt to curb property prices may hurt banks.
Shanghai Composite Index
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Max Chen contributed to this article.